Despite the ESRI's prediction of a soft economic landing, it could still be quite a few months before there is any sense of an upturn

The economy is going through its most difficult period for some years. Exports in most sectors are falling, unemployment is rising and business confidence is shaken.

Are we experiencing a transitory period of difficulty before the economy starts to grow again later this year or early in 2004? Or are we heading into a more prolonged downturn? The answer now relies on the performance of the international economy and so far the picture here remains clouded and uncertain - and not a little worrying.

To step back for a moment, it is now clear that the economy experienced an extraordinary period of "catch-up" during the Celtic Tiger years. There is no gainsaying the extraordinary progress achieved. Living standards rose to the levels of our richer EU partners and total employment soared.

This has led to problems - such as chronic congestion - but as Charlie McCreevy told the Seanad recently: "I remember the days when there was no congestion on the Naas dual carriageway because there was nobody travelling to work, and my attitude is that rich is better."

Now, however, the catching up is over. In future, outperforming the international growth average will be much more difficult, requiring productivity gains here ahead of the norm. The days of recording economic growth rates that are multiples of the international average are over - from now on we will be doing well to outpace the pack by a percentage point, or maybe two.

Right now, there is no question but that the economy is suffering from the poor international picture. Some of the most up-to-date data were provided by this week's figures for trade with non-EU countries.

In the first two months of this year exports were running 3 per cent below the corresponding period last year. Exclude the fast-growing medical and pharmaceutical products sectors and the annual drop comes to 8.5 per cent.

The February figures were particularly weak, down 18 per cent on the previous month,

This continued the generally weak trend shown in the January figures for trade in all markets. Confusing the issue somewhat are the latest industrial production figures, showing strong growth in January and February. However, the industrial production trend has been generally downwards - though not in a straight line - since early last year and what buoyancy there is is probably again due to the medical/pharmaceutical sector.

Confirming the difficult picture with industry is recent survey data from the NCB Purchasing Managers' Index and the IBEC monthly survey, and weak industrial employment.

The other main driver of the economy - the consumer - is also getting much more cautious. The volume of retail sales in February was 2.7 per cent below January's figure and 2 per cent down on February 2002. Excluding car sales, which are weaker this year, the figures were 0.4 per cent down on the previous month and 1.7 per cent higher than the same month last year.

Whichever measure is used it is clear that the trend of recent years is continuing. Having risen by 11.5 per cent in 2000, at the peak of the boom, retail sales volumes rose by just 3.1 per cent in 2001 and 0.7 per cent last year.

The data portray a moment in time. The difficulty, of course, is to judge when the economy has turned and when the worst is over. And this is the difficult bit.

In its forecasts out this week, the ESRI predicts a "soft landing" for the economy, before growth starts to pick up next year.

Two points are relevant here. The first is that even in the ESRI's soft landing scenario, the total number of people at work stops growing and the unemployment rate rises steadily to 5.5 per cent by next year. This would still be a respectable performance by international standards, but would feel a lot different to what we have experienced in recent years.

The second point is that, as the ESRI says, its forecasts of GNP growth of 2.5 per cent this year and 3.5 per cent next year are dependent upon "a strong turnaround in the growth prospects for the major world economies".

So far, such a recovery is not on the horizon. True, the end of the war and the fall in oil prices help to remove a major uncertainty and should improve consumer and business confidence.

But the war has also created new uncertainties in international relations and, combined with security concerns, this may put a brake on the globalisation of trade and investment that has driven the world economy in recent years.

If our economy is to recover, then we need to see a pick-up in inward investment and some revival in demand in our main trading partners. With businesses still in cost-cutting mode, a surge in inward investment is unlikely, notwithstanding some very recent welcome IDA successes in attracting firms here. As for demand, some limited growth is possible in the UK and US markets - though the strong euro will limit gains - but the main continental EU markets remain very depressed. And our loss of competitiveness in recent years will not help.

If the end of the war does lead to a sustained lift in consumer and business spirits, then the ESRI's soft landing may transpire. But this columnist believes that there may be a few bumpy months ahead and that the best we can hope for is to hold as much of our economic gains as possible.

Don't hold your breath, as it could still be quite a few months before we start to feel the recovery.