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Last Updated: Wednesday, 21 January, 2004, 14:53 GMT
Bullish US could end in global slump

By Tim Weber
BBC News Online business editor in Davos

WEF sign
Can the answers be found at the WEF?

Strong economic growth in the United States could soon run out of steam and set up the whole world for a crash, leading economists attending the World Economic Forum have said.

"The US economy is running on fumes", fuelled by rapidly growing US government spending, swelling private household debts and depleted savings, warned Stephen Roach, chief economist at Morgan Stanley.

Once demand falters, no economy in the world would be strong enough to pick up the slack, resulting in a sharp downturn, said Laura Tyson, dean of the London Business School and a former top adviser of President Clinton.

But not everybody is pessimistic. Jacob Frenkel, chairman of Merrill Lynch International and a former top IMF official, believes that a free-floating dollar can be the safety valve to release the pressure in the globalised economic system.

And Fred Bergsten, director of the Institute for International Economics, agreed. The fall of the dollar during the past year had been "orderly" and was already helping to close the yawning gap between US imports and exports.

Footing the bill

The US is saddled with "twin deficits" - in the current account (imports minus exports) and the government budget, which experienced its largest and fastest fall from budget surplus into deficit under President George W Bush.

Mr Frenkel conceded that these deficits were indeed "most dangerous elements for the world economy".

But what mattered most was "not the size of the deficit, but the perception of the deficit," Mr Frenkel argued. Problems would occur only when governments tried in vain to intervene on currency markets.

And worries that Japan and China would stop financing the deficits were brushed aside by Mr Bergsten, who argued that both countries would continue buying US treasury bonds to keep their own currencies low and help their exporters.

Not everybody agrees. Zuh Min, boss of the Bank of China and economic adviser to the Chinese president, noted that during recent years Asia had bought 60% of US government bonds.

Asia would be able to afford this for just another two years at best, Mr Zhu warned.

And Professor Fu Jun of Beijing University, who is seen as being close to the Beijing government, suggested that China might soon peg its currency not to the dollar alone but a basket of currencies.

Growth engine Asia?

China itself, panellists agreed, is set for many years of economic growth.

After two decades where growth had averaged about 8% a year, labour costs were still cheap, inflation low, and there was no sign of domestic demand slowing down as the country experienced rapid urbanisation, said Fu Jun of Beijing University.

A policeman shows the way to a group of skiers in Davos
Skiers aren't the only people seeking direction in Davos
Japan, however, presented a more troubled picture.

At last the economy was growing again, said Takatoshi Ito of Tokyo University, a former high-ranking official in the Japanese finance ministry.

But deflation was effectively wiping out the growth that the statisticians were reporting and the rise in the yen's value was worrying Japanese exporters, he said.

And without government deficit spending the economy would actually still be contracting sharply.

Nobody had yet figured out a way to withdraw this fiscal stimulus without harming the economy as a whole.

Poor or stable Europe?

Standing on the sidelines, meanwhile, was Europe, .

All panellists predicted that recovery would be "very very slow".

Merrill Lynch's Mr Frenkel contrasted this with the United States, where he saw the structural reforms in place that could create a sustained economic recovery: high productivity, low regulation, a flexible workforce and a proactive central bank.

The European Central Bank, in contrast, was roundly criticised for being inflexible and sitting on its hands for far too long.

From the floor, though, rose the question whether slow but steady growth might not be an asset.

Economic growth per head was not much behind that of the US, it was argued, and better overall figures were just a reflection of faster population growth in America.

The Americans on the panel, however, were inclined to disagree.


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