The good, the bad and ugly that awaits us all
Although one cannot read too much into anything at this early stage given that the markets are still in holiday mode, the early days of the New Year have been characterised by a strange sense of calm internationally and lots of negative media headlines domestically.
As we approach the end of the first week of 2012 most international equity markets are in modest positive territory. This marks a welcome change from 2011, which was understandably a difficult year for some markets, but not all.
The US S&P 500 market ended last year up 3.5% and the Dow Jones was up by 9.1%. In contrast, the German market lost 14.7%, the French market lost 17%, the Japanese market lost another 10% and the FTSE 100 in Britain shed 3.l1%. At home the now much smaller ISEQ gained 0.6%.
It is worth noting that the Japanese Nikkei ended 2011 at 8,455. It closed 1989 just under 40,000. Since 1989 the Japanese economy has been virtually stagnant. The Japan case should provide a strong warning to Europe about the dangers and consequences of poor economic policymaking and a failure to address problems at an early stage, before they become embedded.
Despite all of the well-publicised structural issues in the US, not least the unsustainable level of government borrowing and outstanding debt levels, the economy continues to trundle along.
Recently. the influential Institute of Supply Management reading for manufacturing activity was confirmed at 53.9; anything over 50 signifies expansion.
This is positive and indicative of an economy that is still expanding, albeit at an anaemic pace.
Latest minutes from the interest rate-setting meeting of the US Federal Reserve Bank allude to the ongoing weakness in the economy and suggest that current historically low interest rate levels would persist well into 2013. Yet the US economy still holds out some growth prospects for the next year.
But Europe is in a different place. The eurozone index of manufacturing activity was confirmed at 46.9 in December — a reading below 50 signifies a contraction in activity. Likewise, the service sector index came in at just 48.8.
These are important forward looking indicators of activity and both suggest marked weakness over the coming months. This lack of growth is the real issue for European leaders.
The markets are quite relaxed about the eurozone situation and have taken some confidence from the latest fiscal austerity measures announced in Spain and Italy. While political will to tackle the unsustainable fiscal situation in those countries is important, if economic growth prospects do not improve in these two countries and in the rest of the eurozone, the markets will become exercised again before too long.
It remains the case that the ECB will need to become much more accommodative in terms of interest rates and printing money if there is to be any change in outlook for the eurozone.
In Ireland the media attention — which, of course, reflects the realities — has been on health insurance levies, the new household charge, higher public transport costs and higher energy costs, among a litany of other negatives for the beleaguered consumer.
The challenges facing the Government will undoubtedly intensify over the coming months.
I still believe the euro will survive, because the notion that the second largest currency block in the world could be allowed to collapse is frightening in terms of its implications.
But as part of the solution, Ireland must get some relief because its current general debt levels are simply not manageable. We will just have to wait in hope.
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