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Costello warns of recession in the US By IAN HENDERSON 23aug01
THE US central bank's latest attempt to prevent the US economy from sliding into recession could fail, Peter Costello warned yesterday.
The Treasurer's ominous assessment came just hours after the US Federal Reserve Board cut official interest rates by 0.25 percentage points to 3.50 per cent early yesterday, the seventh cut this year.
Explaining its widely anticipated move, the bank said "business profits and capital spending continue to weaken and growth abroad is slowing, weighing on the US economy".
"The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future."
Mr Costello, fending off concerns that the Federal Reserve believed the world was now headed for recession, said the looming slowdown in world growth would take its toll on Australia but posed an even greater threat to the US and Japanese economies.
The international economic outlook "is very, very uncertain, and, probably outside of the Asian financial crisis of 1997, the worst we have seen in well over a decade", Mr Costello told Melbourne radio 3AW.
Japan was already in recession, the giant US economy "is still slowing", Europe's economy "is slowing very considerably" and Australia "will be affected", he said.
As a result, Australia would no longer enjoy "the extremely buoyant conditions" of the recent past. Indeed, the likelihood that the jobless rate would rise to, and stabilise at, 7 per cent was evidence that the slowdown in the three key economic blocs had already begun to put a brake on local economic activity.
His comments reflected the views of the Reserve Bank of Australia, which signalled just a week ago that domestic rates would remain on hold, despite a resurgence of prices pressures, because the international outlook was gloomy and employment had weakened.
But Mr Costello offered cautious optimism about Australia's economic future: while "nobody would ever say that any country is totally fireproof from the world environment", Australia was relatively well placed to deal with the emerging uncertainty.
"What is ahead for us is that we will grow a little slower than we did at the end of the late 1990s, but we will continue to grow and, as it turns out, we will grow faster than Europe and Japan and America," he said.
Commonwealth Bank chief executive David Murray said the domestic economy was "essentially quite sound", while agreeing with Mr Costello's gloomy view about the international economy.
The Reserve Bank, in its most recent assessment of the state of the economy, said that while the US had shown some hope of improvement, "simultaneous" slowing in the main drivers of world growth was the main risk to Australia and that "such risks have increased in recent months".
By 5pm AEST yesterday, the dollar had lifted sharply against the greenback in the wake of the US rate cut -- trading at US53.66c -- up from US53.36c a day earlier.
-- Martin Thompson (email@example.com), August 22, 2001