April 7 represents red letter day for Ireland

WE ARE starting to get mixed signals on the health of the global economy. In the US over the past couple of weeks we have seen clear signs that the housing market may be starting to bottom out.

New and existing home sales and housing starts in the US have all surprised on the upside. Granted, all housing indicators in the US are coming off an extremely low level, so any recovery needs to be kept in perspective, but it is certainly good news that we are at last starting to see some signs of life.

It is very clear to me that the US is the key area to watch, as it led the global economy into recession and will undoubtedly lead the way out of the recession, whenever that happens.

It is also clear to me that the housing market is the key area of the US economy to watch. Given the importance of housing in the US economy, any signs of stabilisation and recovery would certainly give a boost to consumer confidence. Having said all of that, it is very clear that the US economy is still in an extremely difficult place.

Meanwhile, there are official suggestions emanating from Germany that its economy could contract by 4.5% this year, and by 7.5% on a worst case scenario. In addition, the influential Ifo survey of business confidence showed that business confidence has now fallen to the lowest level since 1982.

The export side of the economy is under particular pressure, with a relatively strong euro and awful external markets all putting the external sector of the economy under serious strain.

The upside of this scenario is the ECB (European Central Bank) will undoubtedly be under pressure to cut interest rates further. Another 0.5% looks likely over the coming months, and that might not represent the bottom of the cycle.

Equity markets are taking their lead from the slightly brighter US picture at the moment and despite a bad day on Tuesday are still gradually building up momentum. There is a wall of money in US money markets waiting to go to work, but nervous investors await clear signs that the US economic picture has stabilised. It may still be too early to call the all-clear, but at least markets are getting something positive to chew on.

Yesterday, we got fourth-quarter growth data for Ireland. Not surprisingly, it confirmed that the economy fell off a cliff in the final three months of last year. Real gross national product fell by a massive 6.7%. The only way to describe the overall data is “dire”.

First-quarter growth data when it eventually emerges will be considerably worse. Consumer spending has collapsed further, industrial production remains under pressure, the export performance is struggling and construction has continued to go from bad to worse.

This has clear implications for the upcoming budget. An overly zealous approach to tax increases is not what this ailing economy requires at this juncture.

The key adjustment in the public finances has to come through cuts in government spending, with only modest tax increases acceptable. Of course eventually, we will have to look at broadening the base from which we collect our taxes, while preferably keeping marginal tax rates as low as possible.

April 7 represents a red letter day for Ireland, because if the opportunity to eliminate the fiscal uncertainty is not availed of, domestic confidence and international perceptions of Ireland will not get any better.

The other issue that will need to be addressed is the banking situation and regulation. It appears to me that the only way to address these areas would be to make a clean sweep and start off with a blank sheet of paper. Those who matter do not believe that those individuals who got us into the current mess are the ones who will get us out of it.