global fears as us goes into the red

  1. SCD
    3,438 Posts.
    Global fears as US goes into the red
    By Matt Wade
    January 9, 2004

    The huge black hole in the US budget and the country's ballooning trade deficit are threatening to push up interest rates across the globe and destabilise the international economy, one of the world's most powerful financial institutions has warned.

    The budget deficit - which has swung from a healthy surplus in 2000 to a forecast blowout of more than $US400 billion ($521.2 billion) this year - was a "significant risk" for the rest of the world, the International Monetary Fund said yesterday.

    "Sustained fiscal deficits lower national savings in the United States and will eventually raise real interest rates both in the United States and abroad," said Charles Collyns, deputy director of its western hemisphere department.

    Economists said the warning was important for Australia, as local market interest rates are closely linked to those in the US.

    The fund's warning also echoes concerns raised by the Australian Treasury in its most recent economic assessment last month when it said the US's "twin deficits" - its budget and current account blowouts - were a risk to global economic stability, and therefore posed a threat to the Australia's economic outlook.

    The fund said the US would soon have a foreign debt totalling 40 per cent of its gross domestic product - an "unprecedented level debt for a large industrialised country".

    This could trigger a "disorderly" plunge in the US dollar - and a corresponding jump in other currencies, including the Australian dollar - rocking the global financial system.

    "The possible global risks of a disorderly exchange rate adjustment . . . cannot be ignored," the fund said.

    While the fund's report said the US deficits were a medium-term problem for the world economy, this could have a more immediate impact because financial markets tend to respond quickly to future threats.

    A Macquarie Bank economist, Brian Redican, said there was a close correlation between interest rates in the US and Australia,making the the fund's predictions particularly relevant to Australia.

    "[The fund's scenario] could see Australian rates higher than they otherwise would be," he said.

    The Australian economy has entered 2004 with considerable momentum but there are strong signs it will lose three assets that have bolstered growth: super-low interest rates, a cheap dollar and a housing boom. Given this, many economists believe growth will slow in the second half of the year.

    The Reserve Bank lifted interest rates by a total of half a percentage point in the last two months of 2003, and economists are predicting at least one 0.25 percentage point rise early this year. The IMF's warning suggests there could be upward pressure on Australian rates for some time.

    The greenback has lost ground on global currency markets for 18 months, pushing the Australian dollar above US77 cents for the first time in 6 years this week. It finished yesterday just below its latest peak at US76.77 cents.

    The pace and magnitude of the dollar's rise has already put local exporters under pressure and a fresh plunge in the greenback - a possibility canvassed by the fund - would worsen the impact.

    Economists say a bigger-than-expected slowdown in housing also poses a risk to the economic outlook. A survey released today suggests higher interest rates are taking a toll on expectations of future house price growth.

    The Hawker Britton-UMR Research survey showed the number of people in NSW expecting house prices to rise fell from 66 per cent in September to 46 per cent last month. Those believing prices will drop in NSW had more than doubled to 11 per cent. In Victoria, one in four believes prices will fall.

    The IMF said the US Government must develop a credible five- to 10-year plan to balance its budget and warned this would mean spending cuts and tax rises. While US Government spending had provided valuable support to the weak global economy in recent years, the "large US fiscal deficits also pose significant risks for the rest of the world", it said.

    This story was found at:

arrow-down-2 Created with Sketch. arrow-down-2 Created with Sketch.