Economics:A recession in the US this year would loosen the Republic's increasingly tenuous grip on growth. Moreover, in a slowing international economy, the Republic's economic difficulties would be compounded by the serious losses of competitiveness it has suffered since joining the euro in 1999, writes Paul Tansey.
A US recession inevitably transmits a deflationary impulse to the global economy simply because of the size of the US economy. For the US produces more than one-quarter of total world output.
The gross domestic product (GDP) of the US accounted for 27.8 per cent of world GDP in 2005.
If the biggest economy in an increasingly globalised world stumbles, then all countries suffer to some degree.
The extent to which they suffer depends on the strength of their economic links with the US. The economic ties that bind the Republic and the US are particularly strong.
In the first place, the US is the Republic's largest single foreign market. In 2006, the US purchased 18.3 per cent of all Irish merchandise exports. Moreover, the US is also an important customer for the Republic's growing services exports, particularly in the spheres of financial and business services and tourism.
In the second place, the US is the principal source of foreign direct industrial investment in Ireland. In 2005, US firms accounted for 47 per cent of all IDA-sponsored foreign enterprises operating in this country.
More pertinently, these US enterprises employed 93,000 people, or 70 per cent of the total workforce employed by IDA-sponsored overseas companies based in the Republic.
It is an over-simplification, but not a distortion of reality, to ascribe the Republic's economic lift-off during the 1990s to the large inflow of US high-technology firms. These enterprises, in chemicals, pharmaceuticals, information and communications technology, provided the Republic with a modern industrial base off the shelf and at a trivial cost. It was these enterprises, in combination, that provided the platform from which the export boom of the 1990s was launched.
More generally, the opening up of the economy to foreign trade and to foreign investment - along with a sustained commitment to investment in education - paved the way for the great economic leap forward achieved in the past 15 years.
Increased economic openness allowed the economy to piggyback on the growth of our much larger trading partners, in the US, in Europe and in Britain. Globalisation has been good for Ireland thus far.
But economic openness is two-way. Small economies are carried forward when their larger trading partners are thriving. Conversely, they suffer when their bigger economic brothers are in trouble.
Thus, the slowdown in the economy in 2001-2002 was not an accident. It reflected the fact that growth in the Republic's major trading partners stalled in the wake of 9/11.
Real US GDP slowed to a growth rate of just 0.8 per cent in 2001 and 1.6 per cent in 2002, while the euro area recorded GDP growth rates of 1.6 per cent and 0.9 per cent in these two years.
Thus, the economy - which is very small in global terms - tends to bob like a cork on the waves, reflecting the peaks and troughs of economic performance in its principal trading partners.
In its recent working paper on the Irish economy, the International Monetary Fund sought to quantify the spillover effects on Irish growth of shocks to the economies of Ireland's major trading partners.
It found that shocks to US growth exerted a bigger impact on the pace of economic activity in Ireland than shocks of a similar magnitude to euro-zone or UK growth.
As shown in the table below, the IMF research found that a shock that causes a one percentage point decline in US GDP over a four- quarter horizon ultimately induces annual Irish GDP to decline by 1.8 percentage points.
A shock of similar scale to euro-zone GDP over the same time horizon causes a consequent decline of 1.5 percentage points in annual Irish GDP. Surprisingly, shocks to UK GDP have minimal effects on the Irish economy.
This analysis shows that, despite membership of the euro and extensive trade ties with Europe, the Republic remains marginally closer to Boston than Berlin in economic terms. It also indicates that the Irish economy cannot hope to emerge unscathed from a US recession.
Moreover, the Republic's economic difficulties in the year ahead will be compounded by the persistent losses of competitiveness sustained since 2001.
Since the Republic joined the euro in 1999, Central Bank data show that the Republic's real exchange rate - the nominal trade-weighted exchange rate adjusted for Ireland's inflationary excesses - has appreciated by more than 23 per cent.
Taken together, the imminence of recession in the US, which would curb the growth of the market available to Ireland, combined with the severe losses of real competitiveness already sustained - which makes it more difficult to hold market shares - spell economic trouble for Ireland on the external front in the year ahead.
We have yet to hear a coherent statement from the Government, or from any of its agencies, on how this deterioration in the Republic's external economic prospects is to be addressed.
