Greenspan warns on US economy

Alan Greenspan, chairman of the Federal Reserve, has said that he expects the US economy to grow by between 2% and 2.5% in 2001.

And recent statistics have shown that January was a better month for the US economy.

For the period ahead, downside risks predominate

Alan Greenspan

US retail sales grew by 0.7% in January, the biggest jump in four months.

"The exceptional weakness, so evident in a number of economic indicators toward the end of last year apparently did not continue in January," said Mr Greenspan.

He also said that although short-term company profits had been downgraded, the long-term outlook was more healthy for firms.

And he added that the prospects for sustaining strong advances in productivity in the year ahead remained favourable.

The risks

But the Fed chairman also pinpointed four of the biggest risks that could lead to the US economy slipping into recession.

A break in consumer and business confidence

Uncertainty over the level of adjustment of the stocks of consumer goods and business capital equipment

The slowing of foreign economies having a negative impact on US economy

Lenders are still nervous, and the stock markets have already lost the gains made following previous interest rate cuts.

Mr Greenspan was speaking in front of the Senate Banking Committee.

His question and answer session was closely monitored around the globe for any hint of whether the Fed will cut interest rates further.

If a recession is going to happen.... it's very unlikely to be affected by what the tax policy is going to be

Alan Greenspan

But most discussion focused on the wisdom of President George W Bush's tax cut plan rather than on any future decision regarding interest rates.

The speech did nothing to encourage investor sentiment, and an early rally in the US stockmarkets was squashed.

The blue chip Dow Jones index fell 43.45 points to close at 10,903.32, while the technology Nasdaq index lost 61.96 points to end at 2,427.7.

Changing stance

At the end of January, ahead of the last decision to cut interest rates, Mr Greenspan had said that the US economy was close to zero growth.

And Tuesday's revised estimate of between 2-2.5% displays the large amount of uncertainty over the actual pace of the US economic slowdown.

The reliability of forecasts and predictions also came under fire later in the question and answer session.

Some senators were critical of President Bush's plan to cut taxes on the back of a forecast surplus in the US budget over the next ten years.

It was argued that it is beyond anybody's capability to predict these sort of figures for more than one year in advance.

Mr Greenspan has given his backing to the proposed tax cuts, saying they may prove one way to support a slowing economy.

Most economists still believe that the Federal Reserve could cut interest rates at its next meeting in March, but see its outlook as less aggressive.