October 14, 2011
EMINENT economist Larry Meyer is confident the US will avoid a double-dip recession, but forecasting has never been more difficult in a two-speed world.
"There is a real distinction in the world at the moment between high-growth and low-growth economies," Mr Meyer said.
"I don't think the US is going to have a double-dip but you have to recognise that there's a meaningful probability, maybe one in three."
Mr Meyer, a former US Federal Reserve governor, is touring Australia this week, briefing the Royal Bank of Scotland on the world's economic prospects.
He said the European sovereign debt crisis would slow the world economy, especially as a remedy remained elusive.
"But I think we are moving away from that recessionary risk," he said, noting the second-half data was starting to look better.
"In the UK and Europe, there is deepening stagnation and the recessionary risks are greater in the euro area."
Mr Meyer has forecast that the US economy will grow by 2.25 per cent to 2.5 per cent in the next year, meaning unemployment will remain high but improve as the economy regains strength.
The rate of recovery depended on whether the US policy "paralysis" continued on fiscal management and the budget deficit reduction plan.
"I think you need to look at the US economy's ability to heal and the time it takes to heal, the degree that policy can compensate, plus the overhang of what is outside of the US's control," he said.
"In that context, if you say where will the US be in 12 months, I would say right about where we are today.
"Now, that's not good news in terms of where we want unemployment and inflation" to be.
For unemployment to remain steady and then decline, a growth rate of 2.25 per cent to 2.5 per cent was needed. "But that is better than the alternative. There is a lot of pessimism out there and there are a lot of downside risks. Those growth forecasts are based on no implosion of Europe or the breaking apart of the eurozone."
Mr Meyer said the Australian economy remained in good shape compared with the rest of world, despite forecasts that interest rates could have to be cut.
"Australia faces risk but it's a different situation to many other parts of the world," he said.
"There is the health of the Australian financial system and the budget is in good shape, so there are unique opportunities."
Mr Meyer said global policymakers also faced the difficult task of managing a two-speed economy with emerging nations outpacing developed countries.
Emerging nations provided most of the world's growth but they were fragile, posing a risk to recovery. "Emerging market economies have a high degree of volatility, their financial markets move around disproportionately to Western economic markets," Mr Meyer said.
"Some economies, like China and across Asia, are slowing because they were overheating.
"Sometimes that is how recessions occur, because of an over-reaction. They do face a delicate task of slowing their economies down while Western economies are struggling to find ways to stimulate their economy."
Article by Scott Murdoch From:The Australian