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US tipped to be the powerhouse

FOR those punting on the European community and the euro to remain ‘steady as she goes’ while the rest of the world falters – forget it.

Once again it will be the US that will provide real growth opportunities in the near future.

The most likely scenario is that the European Union will disintegrate under the weight of the competing national interests.

Addressing the Australia-India Chamber of Commerce, Perth financial adviser Suresh Rajan warned that the European Union and the European banks were being plagued by problems with the 13 nation-states that were all at different stages of development and in different phases of the economic cycle.

“I think the chance of the EU disintegrating fairly quickly is very high,” Mr Rajan said.

He said the European Central Bank was unable to make any moves on interest rates although pressure was building from Germany to cut rates, while Italy was calling for increased rates.

The result is that the ECB will do nothing.

Mr Rajan said that if it did act, the result would be a sharp fall in the euro.

“So we have seen a region meander along aimlessly for well over 12 months and closer to 18 months with absolutely no direction from the central banks,” he said.

“What this has done is destroy the little confidence that the economy had managed to engender amongst the populace and we are right back to where we started from in terms of the lack of confidence that the central banks are able to do anything worthwhile to boost the economy there.”

Mr Rajan said the difficulties arose in Europe because the equalising of the various currencies happened too quickly without proper corrections.

While he holds out little hope for any action from Europe to shift interest rates, DailyFX.com chief fundamental strategist Kathy Lien, reacted to the plummeting euro on the market last week, by saying it was likely that rates would fall.

“As warned by German finance minister [Hans] Eichel yesterday, German GDP contracted 0.2 per cent quarter on quarter, which was significantly below expectations,” Ms Lien writes in her Euro focus.

“On top of that, the chief economist of the German central bank warned that the central bank will have to cut its GDP forecast for 2003.

“IMF head Hans Koehler also added that the European Central Bank has room to manoeuvre on interest rates.

“ECB [governing council member and president of the Deutsche Bundesbank Ernst] Welteke joined Mr Koehler by saying that the economic picture has deteriorated since the beginning of the year. This means that it is almost definite that the ECB will cut rates at their June meeting.”

While advising his clients to stay away from European investments, Mr Rajan said the same applied to Japan and Australia.

“Japan is likely to remain a basket case for much longer,” he said.

Australia likewise was suffering a set-back through the impact of the Iraq war, SARS and the drought, which Mr Rajan said he believed put Treasurer Peter Costello’s budget forecast of 3.5 per cent growth for the next financial year under question.

“My estimate is that we will be lucky to come in around 2.5 per cent growth,” Mr Rajan said.

“I’m not that confident about Europe, not that confident about Japan. It seems to me that the only logical choice is in the US.”

Renewed optimism in the US and an injection of more than $700 billion into the economy by the US Government is likely to cause the US economy to outperform Australia with growth of about 4 per cent already this calendar year.

p          See page 35 for latest currency exchange rates

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