Catching cold as the world sneezes

AUSTRALIA can expect weaker growth this year, according to the Reserve Bank of Australia assistant governor, economics, Glenn Stevens.

“The consensus among forecasters about international growth has been marked down over recent months,” Mr Stevens told the recent CEDA/ Telstra Economic and Political Forum

“This is mainly a result of the noticeably weaker prognosis for the US economy, but a softening in some of the short-run data coming out of Europe has been taken to imply somewhat weaker growth there in 2001 than last year,” he said.

Mr Stevens expects forecasters to further revise their forecasts down-wards as the slowdown in the US, the weakness in Europe and the continuing brittleness of the Japanese economy combine to suggest world economic growth would end up being about 3.25 per cent to 3.5 per cent this year.

While this is close to the average outcomes over the past 30 years, it is a long way short of the growth figure for 2000.

The major assumption that these forecasts do rely upon is that the US economy does not encounter a prolonged slump, but rather regains some speed after a soft first half of 2001.

Mr Stevens feels the declines we have seen in US interest rates have already improved the prospects for US and global growth in 2002.

In regard to the Asian region, Mr Stevens forecasts somewhat lower growth than last year.

This is a turnaround from the break-neck pace that had been set in the region as they recovered from the crisis.

The rider that Mr Stevens does put on the region is that there will be some quite distinct differences between individual countries in Asia.

Stevens then went on to examine the implications for Australia.

“A global slump, if it were to develop, would be a serious problem for Australia – as it would be for all exporting countries,” he said.

“This is always true. It seems at present, moreover, that the risk of this has once again increased, as it did just over two years ago.

“What is important in such a situation is the capacity and willingness of the major countries to counter, if needed, contractionary forces with judicious use of expansionary macro policies.

“How much scope there is for such actions usually depends on the extent of imbalances existing in economies.

“The one thing which perhaps could be said with confidence is that, whereas 2000 was a year in which big events at home were the primary focus of economic discussion, in 2001 it appears that attention will turn once again, if it has not already, to events abroad.”

The main aspects that we can draw from his speech are that the world economy is likely to slow considerably to a rate of growth more akin to its long-term average.

The US is already showing signs of the slowdown, as is Europe.

Asia will be patchy and the implications for Australia could be severe if the world goes into a global slump.

Whether it does or not is dependent almost entirely on whether the US goes into recession.

The interest rate cuts in the US will see that economy start to pick up again in 2002.

It is unlikely that we will see Australia go into a serious recession of any kind.

We are certainly in the throes of a marked slowdown now and any small business owner can vouch for that fact.