GLOBAL ECONOMIC conditions have taken a severe turn for the worse over the past year. Twelve months ago, the economic future looked bright.
World trade was growing swiftly. The western industrial world was experiencing solid, if unspectacular, economic growth accompanied by sustained employment expansion. Inflation was an irritant, but remained relatively subdued.
Since then, the economic world has been turned upside down. The US subprime lending crisis has spread like a virulent infection through the international banking system. Fear now stalks the financial markets. As a result, banks have become increasingly unwilling to lend, both to one another and to commercial customers.
Central banks have responded correctly to the crisis. Conscious that a severe contraction in the money supply after the Wall Street Crash of 1929 caused the Great Depression of the 1930s, they have sought to break the logjam in liquidity that is currently preventing the proper functioning of financial markets. The authorities have poured cash into money markets, eased the terms on which they will extend credit and, notably in the US, have engineered steep cuts in official interest rates.
The aggressive approach of the Federal Reserve Board - the US central bank - over the past week is a symptom of the growing severity of the crisis. Since last weekend, the Fed has triggered the takeover of the ailing investment bank Bear Stearns by JP Morgan Chase, arranged the injection of $200 billion into US mortgage markets and cut its key interest rate by three-quarters of a percentage point to 2.25 per cent. Official US interest rates have now been reduced by three percentage points since last summer.
To date, however, the efforts of the monetary authorities have failed to restore trust to financial markets. If the crisis in financial markets persists for much longer, the danger is that it will overflow into the real economy of production and employment. There are signs already that the continued malfunctioning of money markets is exacting a toll in terms of reduced economic activity.
The Organisation for Economic Co-operation and Development (OECD) this week revised downwards its forecasts for economic growth. The OECD now anticipates that the US economy will stall during the first half of 2008 while the pace of economic growth across Europe is forecast to ease back considerably. The expected weakening in economic performance is attributed by the OECD to tighter credit conditions, the downturn in the global housing cycle and the steep increases in commodity prices, notably oil and foodstuffs, which are reducing the purchasing power of consumers.
The Irish boom of the past 15 years was founded on the integration of Ireland into the global economy. However, globalisation is a two-way street. Just as the Irish economy benefits from global growth, so it is acutely vulnerable to international downturns. Ireland cannot expect to escape from the weakening of world markets. Accepting this, it is important that policy is directed at ensuring that the impact of a global downturn is minimised for those in Ireland who can least afford to bear it.