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Thursday, 25 January, 2001, 15:03 GMT
Fears of a hard landing
'Forum News Daily', a daily publication of the World Economic Forum
On the opening day of the Forum the US Economy dominates discussion
by BBC News Online's Orla Ryan in Davos

The only topic of conversation in Davos this year looks set to be the prospects for a hard landing in the US.

Barricaded from the cold and the discontented, leading world economists kicked off the week-long conference in the Swiss ski resort with a discussion of the prospects for the world's largest economy.

"It is going to be real and hurtful

Alan Blinder, Princeton University
Alan Blinder, a former vice chairman of the Federal Reserve , and Kenneth Courtis, of Goldman Sachs, told the BBC that even a slight slowdown in the US would hit world economies hard.

"It is going to be real and hurtful,"Alan Blinder, currently professor of economics at Princeton University said.

Mr Blinder was vice chairman of the Board of Governors of the Federal Reserve Bank between 1994 and 1996.

Sector pain

For some sectors, the effect of a slowdown will be more extreme than others.

"In an economy that goes from 5.5% to 2%, some sectors will go from plus 10% to minus 3%.They will really feel it," Mr Blinder added, referring in particular to the already troubled automotive sector.

Alan S. Blinder, Prof. Economics of the Princeton University,
Alan S. Blinder, during the session 'Hard or Soft Landing? The Impact on the World Economy

He reserves judgement as to whether the expected slowdown will in fact turn to recession.

"I think by most definitions it is going to be slightly on the hard side. For some people a hard landing means a recession. While that is a possibility, that is not a probability," he added.

But if, as he expects, 1% is knocked off world growth, the effects of this will be felt worldwide.

The effect on emerging markets could be "negative and catastrophic", in part because many emerging markets rely on developed countries to buy their exports.

Debt fears

It also isn't just emerging markets, which are vulnerable to a slowdown, Goldman Sach's Courtis said "the G7 is slowing, Japan is slowing and Europe is slowing. We are going to see a lot of bad news."

The situation is further complicated by the build up of private sector and emerging market debt. Falling interest rates could result an implosion of this debt, Mr Courtis said, hitting the banking sector hard.

World markets already had a taste of what this could be like when fears grew that Bank of America could be dragged down by the debts it was owed by the troubled Californian utilities, virtually paralysing the US stock market for a brief time.

More Fed action needed

Consensus is that one interest rate cut in January was not enough and that Federal Reserve chairman Alan Greenspan will choose to cut interest rates at the central bank's meeting next week.

"If the US doesn't cut interest rates a lot and soon, this is not going to be a soft landing," Goldman Sachs' Courtis said.

Professor Blinder foresees interest rates falling 5% or lower.

But the cosy relationship Alan Greenspan enjoyed with the former President Clinton is now a thing of the past, and he has to come to terms with the new President's desire to cut taxes.

This cannot but effect his monetary policy, Mr Blinder said. "That is exactly what Alan Greenspan will have to address personally. Realistically, the answer is probably yes. The tax cuts boost demand and you need less monetary easing."

Mr Greenspan will be addressing Congressional leaders later on Thursday on his views on tax cuts.

And with European leaders such as German finance minister Hans Eichel and ECB economist Otmar Issing set to contiune the discussion over the weekend, it seems unlikely that the debate on the US economy prospects will end there.

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