Although many indicators point south, the number of redundancies is actually falling

There is something strange going on in the economy. Many of the key indicators are pointing "south" - exports are falling sharply, as is industrial production, and sentiment indices for consumers and business are as grim as a Dickens workhouse. The overall level of economic output, as measured by gross national product, is flat, according to the latest available calculations and this is reflected in tax receipts. And our big trading partners are either in periods of slow growth or near recession.

However, more benign signals are coming from the jobs market. Just yesterday, redundancy figures for the first five months showed a total of just over 10,100, a 12 per cent reduction on the same period last year. Unemployment is rising, but at a modest enough rate and the overall level remains low at 4.7 per cent.

Central Statistics Office (CSO) figures, published last week, meanwhile, showed that total employment early this year was a little ahead of autumn last year and more than 25,000 higher than early 2002. While much of this buoyancy is due to higher public sector numbers, the fall in industrial employment has been modest when compared to trends in exports and production.

The "1980s" style Irish economy would have buckled under the weight of the international downturn. The question now is whether the big jobs fall-out is yet to come, or whether the economy has developed a resilience which will allow it to hold in until the upturn arrives.

Is there any way to explain the contrast between the huge difficulties companies are experiencing on international markets and the relative stability of the jobs market?

Lower interest rates are certainly a key factor. There is no doubt that the movement of interest rate control to Frankfurt led to inappropriately low rates over the past couple of years, adding fuel to inflation and to the housing market. Now, however, lower rates are helping to support consumer spending and going some way to cushion business from the decline in competitiveness caused by rising domestic costs and the soaring euro.

Yesterday, the European Central Bank (ECB) cut rates again by 0.5 of a percentage point. From the point of view of the big EU economies, this cut was overdue. It may even prove too late for Germany, teetering on the brink of deflation.

Lower borrowing costs will, however, continue to cushion the Irish economy. Lower rates have a significant enough economic impact, particularly as the total level of personal credit has climbed from around 60 per cent of GDP in the late 1980s to around 100 per cent today.

Low interest rates thus have a bigger impact on the public pocket. One side-effect of this is likely to be to lend support to the housing market. It should also provide some support for consumer demand. Falling borrowing costs are also helping business by lowering funding costs. This may be helping to offset at least some of the pressure from the rising euro for many exporters.

At the level of the overall economy, a rough rule of thumb used by some economists is that a 5 per cent rise in the trade weighted value of the euro is roughly equivalent to a one point rise in interest rates, in terms of its overall impact on growth.

Over the past year, the trade weighted currency indicator - as calculated by the Central Bank - has risen by just over 10 per cent, while base interest rates have now fallen by 2.75 percentage points, with a somewhat smaller fall in most borrowing rates.

So lower interest rates may, indeed, be a key factor cushioning the economy, even if those gaining from lower borrowing costs are a somewhat different group from those suffering due to the rising euro.

And one side effect may be the further encouragement of borrowers, some of whom will be vulnerable when interest rates rise, if the price of the property they buy falls or if, purchasing as an investor, they cannot secure a steady rental income.

What are the dangers facing the economy in the months ahead? Certainly not higher interest rates. The ECB appears to have finally woken up to the dangers facing the EU economy and has hinted that it may even cut rates again, if this is warranted. Euro-zone base rates at 2 per cent are, as Mr Wim Duisenberg, the ECB president, pointed out, still well above US base rates at 1.25 per cent, leaving room for manoeuvre.

The ECB will now watch and wait over the summer, but given the poor state of the big euro economies, there is no prospect of an interest rate "shock" hitting the economy over the next year or so.

The bigger danger lies in the jobs market. So far, total employment has held in remarkably well and the unemployment rate remains low. However, the Central Bank has warned of its concern that jobs may be "hoarded" in many domestic firms. In other words, they are holding off from making people redundant in the hope of a recovery.

The danger is that if this recovery does not come, or if the euro rises sharply further, redundancy levels could rise quickly, unemployment could increase and confidence could take a heavy blow.

However, so far the jobs market has held in and the economy has stalled, rather than crashed. The next few months will now be crucial in setting the direction for the next couple of years.