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Monday, June 7, 1999 Published at 16:19 GMT 17:19 UK

Business: The Economy

World's bankers warning on US economy

The booming US economy is leading the world

The world's central banks are worried about what would happen if the US economy goes into decline.

The Bank for International Settlements (BIS), which groups together central bank officials from around the world, warns that a collapse of the US economic boom could bring economic turmoil to the rest of the world.

"One great danger to continued global expansion at present is that the US economy will overheat and that fears of subsequent recession will undermine stock markets, reduce wealth and cut spending," the BIS says in its annual report.

The BIS is worried because consumers and businesses in the United States are accumulating too much debt to finance the consumer boom, and because the US trade deficit is soaring.

Too much debt

"If investors became less willing to hold the rapidly expanding external debt of the United States, a falling dollar might increase nascent inflationary pressures in the United States, even triggering a hard landing," said BIS Chairman Urban Backstrom, head of the Swedish central bank.

His words echoed some of the fears of the US central bank, the Federal Reserve, which recently said it was considering raising interest rates to cool down the US economy.

The BIS admitted that after a year of global financial turmoil, no one could predict whether stability had now returned to the world economy.

"It would be highly imprudent simply to assume that all will be well," Mr Backstrom told his colleagues.

Risk of deflation

The BIS also warned that there was little inflationary pressure in Europe, and that interest rates could probably fall further.

Indeed, it said that there was now more likelihood of falling prices than ever before.

"However, the success in bringing inflation down to relatively low levels in most countries now means that the risk of deflation is probably higher than it has been for the last 30 or more years," said Andrew Crockett, the BIS general manager.

But bankers were sceptical that a sustained deflation - where prices continue to fall, hurting producers - was likely.

"The basic answer is, central banks have good tools to deal with it," one central banker said.

Euro sceptics

The weakness in Europe's single currency, the euro, is making other central bankers reluctant to adopt it as a reserve currency.

Chris Stahls, South Africa's central banker, said he would not invest in the euro while it continued to fall.

"Not that we have anything against the euro, but we're also a central bank that tries to make money," he said.

In the Far East, central bankers from Hong Kong and Thailand both admitted that they were underweight in the euro, although Hong Kong central banker Joseph Yam said he was now looking to buy.

The euro has fallen more than 12% since its launch in January, and is now worth just over $1.03, compared to $1.17 when it came into being.

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