Jeremy Peat, group chief economist of the Royal Bank of Scotland, writes : If one went entirely by what is happening in the financial markets, then it would be easy to assume that the global economy is sliding down the pan!

The dollar has gone into deep decline, sliding past parity with the Euro. Meantime, equity markets have been in trauma across the globe.

In fact, I would argue that 'real economy' developments in the US and UK in recent weeks have lived up to expectations.

The market decline is a consequence, primarily, of other factors. But that does not mean that this market decline could not have implications for those of us out here in the real economy.

Let us take the good news first. In the US, output and orders have continued to pick up through the second quarter of this year, while employment has started to rise rather than fall.

Output growth is by no means at supersonic levels, but - leaving market developments on one side for now - looks to be becoming more embedded, rather than just an inventory bounce as was the case a few months back.

Back home in the UK, the manufacturing sector has now seen two consecutive months of increase, after declining sharply for over a year.

Industrial output is still lower than a year back, but was almost certainly significantly higher in Q2 than in Q1.

In large part this trend change looks to have been due to improvements in export markets, particularly in the US.

UK GDP should have grown far faster in the period from April to June than in the two previous quarters.

The market developments have not been all bad news. The decline in the dollar against the Euro has pushed the exchange rate back towards equilibrium level, and will help boost US competitiveness.

For the UK, there has been a double gain. Sterling has fallen back against the euro - enhancing the competitiveness of UK exports to the Eurozone and other areas where Eurozone producers provide the main competition.

At the same time, sterling has risen against the dollar, resulting in lower sterling costs for oil and other dollar-priced commodities. This dollar/sterling depreciation should also help to ease margin pressures for hard-pressed manufacturers by lowering their input costs.

Nevertheless, the equity market problems, particularly in the US, are a distinct cause for concern. The decline is primarily due to worries about corporate governance and the reliability of corporate earnings data. These worries have been exacerbated by some market disappointment in the pace of recovery and also in corporate profitability.

US equities have been perceived as over-valued. So has the dollar, given that the market has become less optimistic regarding returns on investment stateside.

Lower equity prices mean lower consumer confidence and lower wealth for US homes.

That in turn means slower growth in consumption. Lower and more volatile equities also means less investment.

Slowdown in consumption and investment implies slower overall US economic growth - and less positive feed through to the global recovery.

So what happens next? Provided the markets stabilise, the positive story in the real economy comes back to the forefront and growth in US, UK and Eurozone returns towards trend by the back end of this year or early 2003. More market turbulence could delay that process.