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Economists discuss the economic cycle in the United States and Australia

TONY EASTLEY: America's top central banker, Alan Greenspan, has hosed down expectations of an early interest rate cut in the United States. In an address to economists in New York, the Federal Reserve Chairman stressed the importance of keeping inflation in check rather than the need to resuscitate economic growth through lower rates. Earlier today, Dr Greenspan told the Senate Banking Committee in Washington that the economy may have recorded negative growth during the second quarter of this year. Two successive quarters of negative growth is technically termed a recession. Joining us from New York is our correspondent, Phillip Lasker.

Phillip, did the Federal Reserve chief sound at all concerned about the economic slow-down?

PHILLIP LASKER: Well, he did say the United States could dive into a steep recession but that was unlikely, mainly because authorities had moved early to slow the economy through increased interest rates, and while that increased the risk of a mild recession, say, two quarters of slight negative growth, there was less of a chance of a serious recession. And although there are signs of slowing, Dr Greenspan doesn't see the type of inventory build-up which can lead to a serious recession - in other words, retailers and manufacturers seeing stocks build up massively because there's a lack of demand, and that causes a drastic increase in unemployment and a very deep recession. Although he did say that some key industries had shown signs of experiencing those problems, so he wasn't discounting the prospect of a steep recession altogether.

Now, the Federal Reserve Committee is going to meet next month to consider interest rates and, not surprisingly, Dr Greenspan said it was difficult to judge what to do about interest rates.

ALAN GREENSPAN: A complex business-cycle process is under way whose outcome is yet to be determined. For the Federal Reserve, it is a time for intensifying our normal surveillance and analysis of ongoing developments to gauge whether policy still is appropriately positioned to foster a sustained economic expansion.

Of one thing I am certain, our Federal open market committee meeting in a couple of weeks will be most engaging. I am also confident that the consideration given to the stance of policy will be in the context of our longer-term goal of price stability. A consistently disciplined monetary policy is what our global financial system increasingly requires and rewards.

PHILLIP LASKER: Now, the first part of those comments, you could see there was an emphasis on perhaps keeping the economy afloat, but the second part, there was a much stronger emphasis on keeping inflation down because he believes that's conducive to encouraging sustained economic growth, and that was a much stronger theme throughout his speech.

TONY EASTLEY: Phil, did he talk about the effect of external factors on the US economy?

PHILLIP LASKER: Well, yes, he did. He talked about external shocks to the international financial system; the fact that the US economy could be derailed by those external shocks; the fact that trade and, therefore, financing had expanded at a rapid rate, so had financial markets and financial instruments, which can often add to the volatility of financial markets. And he talked about the damaging impact of the Barings collapse which he considered had been contained. And he mentioned the difficulty of controlling the speed of financial market responses and the damage caused by the speed of those responses. But he claimed that attempting to regulate or suppress financial markets would be a mistake.

ALAN GREENSPAN: Suppressed markets in one location would be rapidly displaced by others outside the reach of government controls and taxes. Of far greater importance, risk taking would be suppressed. Without enterprises being willing to commit resources to an uncertain future on the basis of a new idea, wealth creation to enhance living standards is not possible. We cannot turn back the clock and we should not try to do so.

TONY EASTLEY: It would seem, Phil, that as, I think, in the words of Alan Greenspan, a complex business cycle is under way and the outcome is yet to be determined?

PHILLIP LASKER: That's right, Tony.

TONY EASTLEY: All right, Phil Lasker, thanks for your time.

Well, history shows that the economic cycle in the United States runs ahead of Australia's so talk of recession in the US will worry many people here for that reason. With news from Japan that it's economy is virtually stagnant, the outlook for Australia has become a little dimmer in the last 24 hours. To discuss the issues in more detail we're joined in the studio by the Chief Economist at Citibank, Grant Bailey. He is speaking with finance reporter, Kevin Wilde.

KEVIN WILDE: Grant Bailey, if the US economy continues to slow and we've already had discussion of a recession, is an interest rate cut there inevitable, even if it isn't imminent?

GRANT BAILEY: I think that's correct, Kevin. It's clear that the economy is slowing reasonably swiftly. Dr Greenspan's comments overnight are really putting the case on either side of this debate as to whether he should go very quickly or, say, wait a few more months. But I think the way the economy is going there that we will see an interest rate cut over the next three months.

KEVIN WILDE: And there's talk of a recession in the US and that will have an effect on our economy. How do you see things panning out over the next 12 months?

GRANT BAILEY: Well, if the United States does go into a recession even as technically defined, it will probably mean that our growth will slow down well below the Government's growth forecast for '95-96 of up close to 4 per cent. So to the degree that the US slows down, if it is a sharp slow-down then we'll see our growth moving down rapidly towards 2 per cent. I doubt, however, whether we would see a technical recession. I think we would see quite subdued growth and in a subdued growth environment that probably means that unemployment rates don't come down much more and probably does start to raise the expectations that we will see a cut in interest rates in Australia.

KEVIN WILDE: Is the likely situation that a cut in Australian interest rates would only be of a fairly small magnitude, maybe half of one per cent because the dollar seems fairly fragile at the moment? That's the belief that the Reserve Bank Governor, Bernie Fraser, has been saying.

GRANT BAILEY: It's certainly a factor which is working against any sort of quick and large action on the interest rate front, and also, when you listen to the Governor's comments and other officials' comments that we do wish to preserve the low inflation gains that we have seen over the past few years, and what we don't want to see is precipitate action that could cause that inflation to jump. So I think that if we do go into an interest rate-easing cycle that it will be a lot milder than what we experienced during '91-92.

KEVIN WILDE: And when do you think that might start? In terms of interest rates, the best case scenario is for the US economy to really come off the ball, but we're not really talking until maybe the first few months of next year.

GRANT BAILEY: That's correct. I would think our central case is for perhaps an easing in that first quarter of next year, but if the US really comes off the ball very swiftly and they go aggressively in the United States in cutting rates, then I think we might be sneaking one in before Christmas.

KEVIN WILDE: There's also bad news out of Japan that hasn't been really a new story, but if we see Japan really not having very much growth and we are one of the few countries that has a trade surplus with them, does that undermine our economic performance?

GRANT BAILEY: It works clearly to slow our economic growth down, particularly via the export window. We get wheat prices for our commodities; we just get restrained export volumes; the weakness in Japan feeding back to weakness in East Asia which, of course, is another major export outlet for us. So yes, not a benign scenario by any stretch of the imagination and one hopes that they can hold the line at these meagre growth rates as it is and it doesn't get any worse.

KEVIN WILDE: Grant Bailey, thanks for your time.

GRANT BAILEY: Thank you.

TONY EASTLEY: Citibank's Grant Bailey talking to our reporter, Kevin Wilde.