Irish economy wins Fitch seal of approval

THE strong endorsement by Fitch Ratings of the Irish economy reaffirms the belief this country has gone about its day-to-day business in a competent manner over the past few decades.

While our roads and the health service still need sorting, and the housing market is set for a tough time, Fitch, one of the world’s leading credit rating agencies, was very positive about the economy’s ability to withstand the current economic slowdown and it reaffirmed our high international credit ratings.

“We do not expect turbulence in the housing market and low growth for a year or two to undermine Ireland’s ‘AAA’ rating. Ireland remains one of the richest countries in Europe and has amply demonstrated its economic flexibility, while the government has shown its consistent determination to maintain sound public finances,” the group said in its statement.

That assessment is reassuring at a time when the global outlook has hit a period of uncertainty.

Crash or recession is very much in the air right now, and with good reason given the serious concerns over the US economy.

Some reckon the economy could already be in decline.

The opposite was the case here in 2002 when it was thought economic output went into negative growth.

CSO figures later showed we delivered growth of 2%.

At the time recession wasn’t obvious and the Irish market was a far cry from what happened in Britain in the late 1980s when restaurants were advertising “recession menus” to attract in the punters.

That was a real recession and nothing as horrific as that time looks to be on the cards, though the pessimists warn it cannot be ruled out.

In the US the negative signs are there as the subprime mortgage lending crisis eats into the profits of US banks, forcing some of the biggest names to dilute existing shareholder interests as they are forced to sell stock to keep dwindling capital ratios at adequate levels.

Merrill Lynch ended this year with losses of $7.8 billion (€5.3bn), and its stock market value has been cut in half in the past year as the credit subprime crisis continues to play out.

In the meantime chairman of the US Federal Reserve Bank, Ben Bernanke backed a €150bn stimulus to lower the risks of a prolonged US recession.

Clearly cutting interest rates will not be enough this time out and there are those who argue that the shallow recession of 2002 just postponed the day of reckoning for the US economy.

Bernanke’s predecessor Alan Greenspan, by cutting rates to 1%, kept consumers buying and the housing market booming, and sceptics say the subrpime crisis and the global credit crunch is the payback for the reckless spending and borrowing.

However, never underestimate the ability of the US to bounce back. The US authorities’ determination to do what they can to keep recession to a minimum has already started to resonate on the money markets and the greenback is starting to make modest gains.

The Fed is expected to cut rates by another half percent at a January 31 meeting in order to inject some fresh life into the world’s number one economy.

While inflation is a continuing thorn in the ECB’s side, standing at 3.1%, the US commitment to lowering borrowing rates should give the ECB enough wriggle room to hold off an interest rate hike in the coming months.

It is accepted that the US is facing tougher times in the next 12 to 18 months and the net result will be slower global growth.

From an Irish perspective that is good news given the pressures facing this economy from falling housing demand that could affect growth well into 2009.