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Does it matter about the United States?

WE often wonder whether the movements on Wall Street and the rest of the US econ-omy mean anything to us here in Australia?

Aren’t we a whole world away and therefore largely insulated from the happenings there?

Isn’t our economy sufficiently mature as to not be dependent on what happens in the boardrooms in New York and Chicago?

Why do the deliberations of “irrational exuberance” as enunciated by Dr Alan Greenspan have any bearing on our economy?

The answers to these questions came in a recent seminar to financial advisers addressed by Dr Chris Caton, the chief economist of the BT Financial Group.

Dr Caton did acknowledge that these correlations come from the website, whose address is www.dismal.com.

The interesting aspects that come out of this table are the close correlation that our economy has with the US economy. (See table)

The level of correlation between the growth of our GDP with that of the US growth is second only to Canada.

Given Canada’s proximity to the US and the dependence of Canada’s exporters on the US it is understandable.

But there are no geographic reasons for Australia to exhibit the correlation that it does.

We are significantly more closely correlated to the US as is Germany and even more so than Mexico.

Irrespective of the reasons for the close correlations, the important thing that we take away from the table is that we are closely correlated with the US GDP growth rates.

Therefore, if we are expect-ing a hard landing in the US as a number of commentators are, this does not augur well for us here in Australia.

It would seem, with the degree of correlation shown illustrated that we would be fairly close behind in the move into a recessionary environment.

Dr Caton pointed out, however, that despite the generally accepted definition of a recession being two quarters of negative growth, he did not necessarily accept that.

In his view the key to the existence or otherwise of a recession is the rate of un-employment.

In Dr Caton’s estimate, if we went from the current unemployment rate of 6.3 per cent to a figure of 7.3 per cent with all the other conditions remaining as they are today, then we certainly were in a recession.

Already we have seen the 6.3 per cent go to 6.9 per cent, suggesting that Dr Caton’s view could be achieved soon.

The saviour to the US economy would have to be seen to be Dr Alan Greenspan and his henchmen at the Federal Reserve in America.

The market had anticipated that Dr Greenspan would cut rates by at least 0.75 per cent last week.

Hence, when the Fed only dropped rates by 0.5 per cent the market reacted badly and fell in excess of 200 points on the days trade.

The cut in rates was certainly not enough to save the American economy from a recession.

If we then follow through the correlations illustrated, a US recession is going to manifest itself in a recession here as well.

n Contact Suresh on suresh.rajan@advisernet.com.au

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