IT HAS been an unsettling week. The economy appears to be stalling. The chances of slumping back into recession have risen. The banking system faces massive and imminent funding challenges. The destructive force of Anglo Irish Bank continues to wreak havoc. Yields on government bonds are stuck at dizzying levels. International sentiment towards Ireland seems to be swinging against.
These are serious times to be sure: a jobs-rich recovery is still nowhere in sight and the danger of things taking a serious turn for the worse is clear and present. But genuine concern must not turn to blind pessimism. Ireland’s economy is undoubtedly in worse shape than most other developed countries, but its openness means that we stand to gain more from a global upturn. This week brought some reassurance that the international recovery is holding.
Yesterday’s much anticipated employment figures in our largest export market – the US – showed not only that the private sector created more jobs in August than expected, but that earlier numbers had underestimated the strength of private employment gains in June and July. This goes some way to alleviating concerns about a return to recession in the world’s largest economy.
Closer to home, the European economy continues to recover and on Thursday the president of the European Central Bank, Jean Claude Trichet, announced that he was revising upwards the bank’s economic growth forecast for the continent. At the same time, he maintained the bank’s stance on official interest rates. They will remain at historically low levels well into 2011, offering some relief to those struggling to service debt. It should also give succour that the German economy – the rock upon which the euro edifice rests – is stronger than ever.
Had Ireland not been part of the euro area, it would long ago have gone the way of Iceland, and become a ward of the International Monetary Fund. Two years ago, that country’s banks collapsed and its currency plummeted in value. Ireland kept its banks standing and could not devalue owing to its euro area membership. These two paths could hardly have been more different. Yet despite the advantage of devaluation, Iceland yesterday reported another massive economic contraction. In the second quarter of the year, its gross domestic product shrank by an almost unprecedented 3.3 per cent in just three months. GDP was down a full 8.4 per cent on a year earlier. If nothing else, this shows that when economies suffer the sort of bubble bursts experienced by Ireland and Iceland, there are no fast and easy ways to recover. This should be kept in mind as debate continues on the future of Anglo Irish Bank, the wider banking system and other aspects of economic policy.
Three and a half years after the domestic property bubble burst and two years after the international financial crisis broke out, Ireland’s economic situation remains very fragile. The recovery internationally could reignite our recovery. Banking problems could drag us back. But no outcome is inevitable. Fortitude is needed now, not despair.