Economic outlook on shaky ground

FRAGILE business and consumer confidence makes it difficult to be upbeat about near-term economic growth prospects.

That's how Dr Dan McLaughlin, chief economist, Bank of Ireland Treasury and International Banking views the current fiscal climate.

"We are in a volatile situation and markets and currencies could go anywhere," he warned.

But the usually upbeat economist says despite the attack on the dollar at $1.09 to the euro at one point yesterday he believes speculators will be wary of shorting the oil market or betting too heavily against the dollar.

By the year end he says the euro will buy just $1 as the US economy takes over as the driving force in the global economy once again.

In particular, economists are watching whether the war on Iraq will be a short one or if Saddam Hussein will go into voluntary exile.

Against that background he says fund managers know they could go home any Friday night and come back in the following Monday morning to discover Saddam had gone into exile.

In his view the current state of the markets could turn on such an event and for that reason he suspects the volatility will be less than it otherwise could be.

Since the start of the year the markets have been hammered. But the US markets are down less than their European counterparts suggesting analysts see the growth story being in the US and not Europe when the recovery comes about.

Economists think this will happen in the second half of the year after the Iraqi situation is out of the way.

In the meantime, the flow of funds is out of the US into the euro and other currencies as speculative selling offers investors to sell the dollar and buy the euro and the Swiss franc which has increased in value by over 20%, to reach a four-year high against the dollar.

At one point yesterday the euro rose to $1.09 only to fall back to $1.07 following rumours that the Japanese and the Swiss authorities were buying the dollar in order to weaken their own currencies.

In less than an hour Niall Dunne of Ulster Bank Markets said the euro lost 1c to the dollar which means a loss of €10,000 for anyone who bought in an hour earlier at the higher price.

That exemplifies the scale of the nervousness with the uncertainty to last until the Iraq situation is cleared up, said economists yesterday.

Meanwhile, oil prices have shot up from 28 per barrel in November to over $33 yesterday amid fears the price per barrel could hit $40 plus if the war on Iraq cranks up, said Niall Dunne.

Since the start of the year the stock markets have taken a hammering with the Dow in New York down 3%. That contrasts sharply with the 7% fall in the German Dax and a dip of 10% in London's FTSE 100, now down at seven-year lows.

Those falls suggest fund managers still see the US as providing the best opportunity for growth in the current year, despite the huge uncertainty created by the build up to war in Iraq.