Investor: The recovery in equity prices over recent months has come as a much-needed fillip to the pension fund industry. This rally in stock markets enabled the average Irish managed pension fund to record a gain of 9 per cent for the second quarter of 2003.

This strong return was sufficient to more than wipe out the losses of the first quarter and leaves most managed pension funds with year-to-date gains of 3-5 per cent.

The medium-term returns are still very poor but at least it seems that pension fund trustees may be able to look forward to a more stable investment climate.

If the first half of the year was dominated by the war in Iraq, worries about global terrorism and SARS, debate during the second half of the year could well be dominated by economics.

Recent statements by Mr Pedro Solbes, the European Union Commissioner for Monetary Affairs, has refocused attention on the poor near-term prospects for the euro zone.

Mr Solbes admitted that the 1 per cent growth forecast for 2003 made by the European Commission in April was unlikely to be achieved. This difficult economic environment is reflected in a German economy that is teetering on the brink of recession and stagnation in other big euro-zone countries such as France.

Slow-to-non-existent economic growth is feeding through into rising government deficits. Already, Germany, France and Portugal have breached the EU's Stability and Growth Pact deficit ceiling of 3 per cent of gross domestic product.

In contrast, some of the recent US economic data releases lend some support, albeit mixed, to the view that an economic recovery may gather steam over the second half of the year.

Although prospects for the US economy remain finely balanced, key factors bolstering the odds in favour of a recovery are the further reduction in US interest rates to 1 per cent and tax cuts by the Bush administration.

Investors in the US would seem to be taking the view that the US economy is on the brink of better times. US stock market indices outperformed most other global equity indices during the second quarter, led by the Nasdaq index, which rose by close to 25 per cent.

Whilst the rise in global equity markets has come as a welcome boon to investors, if equity values are to advance further, then economic growth must pick up from current low levels.

A somewhat contradictory feature of financial markets over the first half was that bond and equity markets rallied strongly at the same time.

'The prices of fixed-interest government bonds rose because of a view that deflationary pressures were strengthening, whilst share prices rose as investors hoped for a second-half economic recovery. It is possible for both views to turn out to be correct.

Consumer price inflation could decline to close to zero whilst at the same time real economic growth picks up. This would be the ideal scenario for investors but, unfortunately, is the least likely outcome.

Of the world's three main economic blocs - US, Europe and Japan - the US economy is the only one that has a good chance of a second-half economic recovery.

In Europe, it seems certain that growth will deteriorate further in 2003 and the expectations of a serious bounce in economic activity in 2004 are no more than pious hopes. The strong euro and a central bank that is reluctant to reduce interest rates as speedily as the US's Federal Reserve are key factors underpinning this pessimistic outlook for the euro zone.

In the Far East, Japan seems set to remain mired in a deflationary recession for the foreseeable future.

The Irish economy is clearly not immune to these global economic forces and forecasts of Irish economic growth are being revised down for this year and next year. It now seems that the economy will be doing well to sustain overall economic growth in the 2-3 per cent range.

This is below the economy's trend growth rate and means that unemployment is set to rise over the next 18 months.

Whilst the Irish economy will continue to outperform the euro zone as a whole, it is inevitable that the economy will move in line with the broad euro-zone economic cycle.

A key negative influence on the Irish economy, due to the large size of the traded goods sector relative to the overall economy, is the appreciation of the euro.

The implications for equity markets of this uncertain economic outlook are very difficult to predict. If the US economy recovers in the second half of the year and if the European economy stabilises, then equity markets may be able to advance further.

If economic growth fails to pick up in the US, then it is difficult to see how share prices can rise from current levels. Economic data and how the experts interpret them seem set to become centre stage during the second half of the year, in sharp contrast to the dominant influence of geopolitical events during the first half of 2003.