It does not take the powers of a clairvoyant to see that the US economy faces a struggle to rebound in the next year or so. Even before the events of September 11, key drivers such as stock prices and capital spending were heading downwards and the attacks on the US have dented confidence further.
Since many Asian economies, including Hong Kong, Singapore and South Korea, are big exporters to the US, concern has been growing over the likely impact of a slowdown in this region as well. At a Goldman Sachs press briefing in Hong Kong yesterday (Tuesday), the bank's chief US economist William Dudley set out his outlook for the US economy and also had a few brief comments about the short-term impact on Asia.
"It will have an impact on Hong Kong and the rest of the region because US demand will be weaker for consumer and capital goods," asserts Dudley. "This will have a ripple effect going forward. On a more positive note, tech spending has gone down as far as likely and will improve in the medium-term, but not in the near future."
As for the US economy, Dudley has revised Goldman's forecasts, but stresses that the situation was not good prior to September 11. "I was pessimistic about the US economy before due to the investment bust, I did not expect a turnaround in the tech sector, and thought consumer spending would be weak for an extended period of time," he says.
In real GDP terms, Dudley now expects a contraction in the economy of 0.5% in the third quarter, a further decline of 2.5% in the final three months of 2001 before a moderate pick up of 0.5% in the first quarter of 2002. Unemployment ù 4.2% at the start of the year ù is expected to approach the 6% mark over the next year.
Understandably, Dudley is concerned about the impact that future threats to US security will have on the economy and how difficult the current situation will be to resolve. "Our forecast is based on the idea that this is a one-off act, that the response will be effective and that confidence will come back quickly," he says. "I am not entirely optimistic about this as it's not like the Gulf War where there was a beginning, a middle and an end. Nobody knows when it will be completely safe and any further incidents will act as a bigger blow to confidence in the economy."
Assuming that September 11 was a one-off, Dudley advocates an aggressive use of both monetary and fiscal policy. "We will see more easing of interest rates and they'll go down to 2%," he believes. "We do not want a repeat of the Japanese experience of the late 1980's, early 1990's where interest rates were kept up."
We also need more fiscal spending, and to cut taxes now and by a lot," adds Dudley. "We need a stimulus because that will facilitate the necessary increase in savings, raising incomes without forcing a cutback on consumer spending. I would like to see a sizeable tax cut package in excess of $60 billion in 2002. The consequences for the budget may not be good, but it's important to use fiscal policy in a supportive way during the bad times."
Dudley believes that in the coming months indices on such issues as consumer confidence and the labor market will give a clearer picture on where the US economy is heading. "There's no question that there has been a decline in confidence and the figures will show a sharp drop in September," he concludes. "I will be interested in the figures from October onwards, as they'll indicate how sharply confidence has been dented and the labor market will show how fast unemployment is dropping."