Investor/An insider's guide to the market: With equity markets generally continuing to perform well, investors could be forgiven for becoming a little complacent regarding the prospects for the global economy.

The continued strength across the markets does seem to reflect growing confidence in the view that a sustainable global economic recovery will be well under way by the end of the year.

Recently released figures for the second quarter performance of the euro-zone economy must, however, be giving some investors pause for thought. Euro-zone GDP was flat across the continent in quarter two and three countries - Germany, the Netherlands and Italy - were in technical recession, which is defined as two successive quarters of negative GDP growth.

Germany, the largest euro-zone economy, saw its GDP contract by 0.1 per cent in the second quarter following a contraction of 0.2 per cent in the first quarter. These figures confirm that the euro zone is growing more slowly than the US. It is also under-performing the Japanese economy, which has recently begun to grow, in the face of many pessimistic economic forecasts.

It may come as some surprise to many investors that this official confirmation of a stagnant euro-zone economy has had no negative impact on Europe's financial markets. The reason would seem to be that several forward-looking indicators have begun to signal a turning point in the euro-zone economic cycle.

Recent surveys of Europe's retailers and car manufacturers have reported indications of a significant pick-up in demand. Proposed tax cuts in Germany and a lagged response to interest rate cuts are likely to provide a positive stimulus to demand during the second half of the year and into 2004.

A further plank supporting this more optimistic outlook for the second half of 2003 and beyond is the belief that the European economy can recover in lagged response to a resurgent US economy.

Whilst the US economy also seems to be at a turning point, the evidence is mounting that a sustainable recovery may already have taken hold.

Recent statistics for the labour market indicate that, at worst, the unemployment situation is stabilising.

The weekly US jobless claims figures have been running at just under 400,000 for several weeks. This is the level that is considered to be the threshold indicator as to whether the labour market is deteriorating or improving and if it declines further it will be a strong indication that the US economy has moved into a growth phase.

The July figure for US retail sales provided further strong evidence that the pace of recovery in the US economy was picking up. The overall figure was a rise of 1.4 per cent compared with expectations for a rise of 1 per cent. In addition the rate of growth in June was revised up to 0.9 per cent.

This somewhat stronger pattern in demand is being reflected in slightly stronger price inflation. In July, US producer prices, excluding food and energy, rose by 0.2 per cent compared with expectations for no change. The combination of stronger consumer demand and small rises in producer prices will almost certainly reduce fears of the risks posed by deflationary pressures.

Recent statements from the Federal Reserve suggest that the US central bank has also become more sanguine regarding the threat posed by deflationary risks. Mr Alan Greenspan, the Fed chairman, has indicated that short-term interest rates will stay at historic lows for as long as it takes to stimulate a sustained cyclical economic recovery.

However, US financial markets are indicating that the bottom of the interest rate cycle has already been reached. US bond yields have risen sharply over recent months and the 10-year yield is now 4.5 per cent compared with lows of 3.6 per cent earlier this year. Euro-zone bond yields have also risen but by a smaller margin and Irish and German bond yields are trading at approximately 4.2 per cent.

In the absence of a fresh external shock akin to September 11th or the Iraq war, there seems to be greater clarity emerging regarding global economic prospects over the next six to 12 months. Regarding short-term interest rates, the next move in the US is likely to be up, although the timing is sill some way into the future.

There is greater uncertainty in Europe but there is a growing body of opinion that 2 per cent will mark the low point of euro short-term interest rates for this economic cycle. Rates of inflation are likely to remain very low, but the risks of across-the-board price declines are likely to continue to fade.

The US economy could well be growing at a healthy pace before year-end with a decent recovery emerging in Europe early next year. This scenario or one close to it would provide a good environment for business and would create an environment that would be broadly favourable to equity markets.