INVESTOR: It is often said that in the fog of war the first casualty is the truth. The corollary for those involved in the financial markets is that the fog of war can cloud and distort the messages emanating from economic and financial data.

Current economic data releases for the US and Europe relate largely to activity in January and February when war jitters would have been at their peak. This makes interpretation of economic data even more difficult than usual.

For example, recent indicators of US consumer confidence have plunged to very low levels. Is this drop in confidence a signal that US consumer spending is going to plummet in coming months or does it merely reflect a loss of confidence that will rebound sharply once the war with Iraq concludes?

At a time when accurate assessment of economic developments is at a premium, public policy makers and financial analysts will often look for clues in the reaction of financial markets to new information.

In theory, financial markets incorporate all known information rapidly into asset prices. As such, stock and bond markets deliver an almost instant analysis of all available information that may affect economic developments.

The accompanying table shows the year-to-date returns for the US, European and Irish equity indices for a selection of data just prior to, and just after, the outbreak of hostilities.

In the week prior to the war, markets had begun to stabilise but at low levels.

On March 13th, the Standard & Poor's 500 index had fallen 5.5 per cent in the year to date, the Eurotop300 was down just short of 15 per cent while the ISEQ Overall index had declined by 4.1 per cent.

Once the war started, equity markets had already started to rally and by March 17th the year-to-date declines had been trimmed by a substantial margin.

Markets then rallied further in the first few days of the war but, by March 24th, some of these gains had been relinquished.

Anyone hoping to derive clear signals from this market volatility will have their work cut out.

Nevertheless, it does seem that the onset of war has at least removed some of the geopolitical risk premium that had been built into share prices.

However, ongoing high levels of volatility are likely to be the order of the day, making it very difficult to draw any firm conclusions from market movements in the current climate.

Therefore, investors have no alternative but to look through the fog of current high levels of asset price volatility and focus instead on the underlying economic and financial fundamentals.

In this regard, the outlook does remain fairly downbeat. In a recent speech, Mr Klaus Regling, the European Commission's director-general for economic and financial affairs, said growth in the euro zone would be about 1 per cent this year, down from earlier predictions of 2 per cent growth.

This mirrors the recent downbeat assessments of European growth prospects that have been emanating from the European Central Bank, which has led many independent forecasters to predict further cuts in official interest rates in coming months.

The British economy has also been experiencing a recent slowdown in economic growth.

Business investment has been particularly weak for a prolonged period but, more recently, signs have emerged pointing to a significant slowdown in consumer spending.

Recent retail sales data showed that spending in the shops had slowed to its weakest rate for three years.

The story in the US economy is similar, with markets only expecting an anaemic post-war recovery. Such growth that there is in the United States is heavily dependent on interest rates being kept at extremely low levels.

The global economic picture continues to be one of very slow growth with a real risk of another slide into recession.

Inflation is no longer perceived as a serious threat to the global financial system.

The bigger threat now is that of deflation, where declines in prices of goods and assets increase the real value of already high levels of consumer and corporate debt.

The increased willingness of central banks to push interest rates down to extremely low levels will probably be sufficient to stave off the emergence of a global deflationary spiral similar to that being experienced in Japan.

Nevertheless, once the fog of this war is burnt away, investors will probably continue to find that they must make their investment decisions in the context of a struggling global economy for the foreseeable future.