CANBERRA—A top U.S. economist believes the United States will avoid a full-scale recession, and expects Australia will remain propped up by Asian demand for its resources for many years yet.
U.S. global economist David Hale—the Commonwealth Bank of Australia's (CBA) global economic adviser—is forecasting Australian economic growth of 3.5 per cent in 2008.
On the eve of the Reserve Bank of Australia's (RBA) March board meeting—where it is expected to raise interest rates again—Mr Hale told a CBA lunch in Canberra that Australia has the "unique challenge of coping with prosperity".
He said the commodity boom was generating inflation and it was not yet clear how far the process of raising interest rates would go.
Michael Blythe, CBA's Chief Economist in Australia, expects the RBA to raise the official cash rate to 7.25 per cent from 7.0 per cent tomorrow, and to 7.5 per cent by the end of the year.
"There's no doubt at all that the commodity boom in the last few years has provided an enormous injection of income," Mr Blythe said.
He said it translated to extra spending power for every Australian of about $3,500 per annum.
"At the moment we are reading stories about Japanese and Korean steel mills signing up for 65 per cent increases in iron ore prices," Mr Blythe said.
"So at the time of maximum uncertainty about the global outlook and actual global market volatility, these companies are signing up for massive increases in prices.
"It certainly suggests a fair degree of confidence in their own prospects, and the prospects for their customers as well."
Mr Hale said the major policy response to the US sub-prime mortgage market collapse—which has triggered a sharp downturn in the broader U.S. economy—should prevent a full-scale recession.
The Federal Reserve has cut interest rates to 3.0 from 5.25 per cent, Congress has agreed $100 billion of tax cuts, and government mortgage agencies have been liberalised in their lending limits.
"The US is heading for two very weak quarters, maybe a growth rate of zero—plus or minus one per cent—but I don't yet think that it is clear-cut that it will be a full scale recession," Mr Hale said.
A weak housing sector was being offset by strong corporate profits and a booming export sector, helped by a weak U.S. dollar, he said.
"At some point growth will improve and I can imagine a growth rate next year of 2.5 per cent, maybe 3.0 per cent, and when that comes to pass US monetary policy will change," he said.
He expects Chinese economic growth to speed along at 10 per cent this year, down just a tad from 11 per cent this year, and its export market to displace Germany as the world's top exporting nation this year.
Within China, 15 million people were moving to the cities from the countryside every year, he said.
"This means they have to rebuild New York City every six or seven months," he said.
This meant continuing massive demand for cement, copper and steel with urban China likely to grow to 70 per cent from 44 per cent now by 2035 to 2040.
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