As the year draws to a close, the international economic picture is beginning to become a little clearer. Economic statistics are a lagging indicator and we will be well into next year before the statisticians will be able to publish final figures for 2001.

Nevertheless, it is now generally accepted that aggregate GDP for the developed countries as a whole is in decline for the second half of 2001. For example, recent figures for Germany show that real output was static in the second quarter - and actually declined marginally in the third. The US economy contracted in the third quarter, and further contraction is anticipated during the final quarter.

For Ireland, the data clearly indicates that the economy has been in decline from the middle of this year. Imports and exports are now running at levels significantly below those of last year.

Construction activity outside of publicly funded infrastructural projects has also slowed considerably. The recent budget will act to provide some stimulus to the economy. However, it is developments in the global economy, and particularly the US economy, which will drive the Irish economic scene in forthcoming years.

In this respect, there is intense debate as to whether the US economy will begin to recover in the spring/summer of next year. Most people will recall that earlier this year the consensus view was for a US economic recovery beginning around now.

This has proved to be patently over-optimistic, and even prior to the events of September 11th the US recession was proving to be far deeper and pervasive than this consensus. A new consensus has now emerged, taking the view that a US economic recovery will be well under way by the middle of next year. The key plank underpinning the optimists' viewpoint lies in the dramatic easing of US monetary policy that has occurred this year.

The slope of the yield curve as measured by the difference between short-term interest rates and long-term government bond yields is closely watched by analysts as a measure of whether monetary conditions are expansionary or contractionary. In the view of many economists and analysts it is the gap between short- and long-term rates that is more important than actual levels.

As can be seen from the table, the US yield curve indicates that monetary conditions are now very loose. Short-term interest rates are 280 basis points below 10-year bond yields. This contrasts with the UK and Europe, where short-term interest rates are 70 basis points and 120 basis points respectively below 10-year bond yields. On this basis, the European Central Bank (ECB) is taking a more expansionary monetary stance than is the Bank of England.

Typically, if a country runs an expansionary monetary policy, its currency will tend to weaken. This is because low interest rates make the currency less attractive to hold and also because low interest rates are associated with weak economic conditions.

However, the behaviour of the US currency this year has been perverse in this regard as the US dollar has appreciated quite significantly. Many economists view strengthening of the exchange rate as being equivalent to a tightening of monetary conditions. Therefore, the current weakness in the euro (which is the other side of strength) should be acting to stimulate the European economy, thus providing some justification to the slow pace of interest rate reductions engineered by the ECB.

From the perspective of the Irish economy, the weak euro has probably acted to stimulate the economy to a significant extent in recent years. Low interest rates have also had a positive effect and with the economy now slowing down, such low interest rates are now appropriate for the economy.

However, a stronger euro, by reducing our international competitiveness, would act to reduce our ability to quickly recover from the current slowdown. In this regard, the Irish economy is even more geared to an early US economic recovery in 2002, as any such recovery would probably be accompanied by a strengthening dollar.

Failure by the US economy to recover, accompanied by a weakening dollar (and a correspondingly stronger euro) would be a double blow to hopes for an Irish economic revival during 2002.

Whilst the optimists may be proved right, current economic and financial conditions are still sending mixed signals regarding the prospects for the first half of next year.