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Anybody for a cold double dip?

THE US economy, the engine that pulls the global growth train, is puffing to a halt in the sidings. In some ways, what is happening is a mirror image of the 1997 Asian crisis. This time it is America grappling with the bursting of a debt-financed asset balloon, a flight from its currency, corporate crooks, and precipitous falls in its equity markets.

The US comprises nearly one third of world GDP, and a relapse into a double dip recession would be bad news all round. But at least its export market is not as crucial to us as Canberra sometimes suggests when explaining our foreign policy. Last year we bought $US15 billion worth of goods and services from the US, and managed to export back just half that figure in petroleum, beef, lamb, metals and manufactured goods. Asia accounts for 57 per cent of our total exports. Japan retains the position of our biggest trade partner, which it has held for a quarter of a century.

Only a month or so ago the Asia-Pacific countries were seen as recovering strongly. Now the region is like the curate’s egg – good in parts. A revival of domestic demand is driving South Korea, Malaysia, the Philippines and Thailand. Hong Kong has deep structural problems, with incomes and asset prices slumping, and its manufacturing sector migrating to China. Taiwan and Singapore are battling. In the first six months of this year, overseas investors pumped $US25 billion into China and the 2002 total will exceed last year’s record $US44 billion. WTO membership will bring in billions more, helping to underwrite China’s current 8 per cent growth rate.

It is interesting to note that foreigners spent $US124 billion buying companies and assets in the US last year – down from $US301 billion and falling fast. Where once all roads led to Manhattan, capital flows are now turning against the US. The latest evidence that China knows how to play the capitalist game came with the news that the central bank has been a big seller of greenbacks. The proportion of US dollars that Beijing holds in foreign exchange reserves has dropped from 65 per cent to 60 per cent, while the amount kept in euros is up from 15 per cent to 20 per cent. Good call.

The conventional wisdom is that, when America is in trouble, Australia gets kicked hard in the hip pocket. Conventional wisdom has a high failure rate in recent times, however. Historically, the Aussie economy closely tracks its US counterpart. That relationship began to loosen more than two years ago – around the time the high tech miracle turned out to be a hole in the world, down which trillions of dollars subsequently vanished.

Now the contrast is stark. The US is barely growing at all, while the Australian economy is still barrelling ahead at 4 per cent. Consumer spending and housing cannot keep up this cracking pace. The drought is proving a drag, and exports are declining – although fears of the local currency soaring again have receded. Bright spots include a still-expected surge in business investment and a big boost from non-residential construction. Salomon Smith Barney forecasts over $11 billion of major works getting under way this year, led by mining, office and retail building, plus rail and road projects. To be sure, investment spending could be pulled if the global picture darkens.

Evidence of deterioration in European growth is piling up. A further disruptive dive in the US dollar is the biggest downside risk.

Australian business fears interest hikes above death itself. In the current environment, the Reserve Bank is surely sitting on its hands. Goldman Sachs predicted this week that US rates would soon be cut yet again from their 40-year low of 1.75 per cent. A counter argument is that such a drastic move would spook nervous investors at home and abroad. But it must be on the agenda. Further reducing the cost of debt servicing and the price of new borrowing would help consumers and corporations alike.

Curtailing inflation is no longer an issue for Alan Greenspan and the Federal Reserve. The concern is falling into the same deflationary downward spiral that has blighted Japan for a dozen years. Now that would really be something to worry about.

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