US economy faces hard landing By Alan Beattie in Basle Published: June 11 2001 20:56GMT | Last Updated: June 12 2001 03:22GMT
The US economy risks a hard landing unless growth picks up elsewhere in the world, the Bank for International Settlements said on Monday.
Imbalances in the US economy - the huge current account deficit, high private debt and low savings ratio - would have to be redressed, according to the annual report of the organisation, which is the central banks' central bank.
Andrew Crockett, the bank's general manager, said a prolonged U-shape downturn rather than a sharp V-shaped recovery was most likely.
While there had undoubtedly been a sustained rise in US productivity growth, demand had run ahead of supply. "It is important not to exaggerate on the productivity side and plan a demand expansion on that basis," he said.
He said a rise in economic growth in the rest of the world and a gradual depreciation of the dollar would enable the US to make a smoother, though more prolonged, transition to stability. "But if these things do not happen, the risk remains of more disruption, and that is something we have always warned about."
The BIS said larger and more liquid financial markets had allowed the US to live beyond its means longer than in the past. Greater financial sophistication meant there was "more scope for disruptive adjustments as well as more productive use of capital", Mr Crockett said.
The bank's annual report also suggested the US Federal Reserve had less room to cut interest rates than hitherto, citing signs of incipient inflationary pressure such as the increase in long-term US interest rates since March.
William White, the BIS economic adviser, said: "The situation looks a bit more problematical on the inflation front than three months ago." But he refused to say whether the Fed should cut rates again.
The report was less restrained in giving advice to other central banks, urging the European Central Bank to loosen monetary policy if growth prospects weakened, and calling for Japanese interest rates to remain at zero.
It criticised the Japanese government for failing to restructure corporations and banks. "The major impediment to fundamental change is still the special-interest political system in Japan and the culture of mutual obligation," the report said.
"While there is now more talk of action under a new prime minister, this will only materialise once a political consensus has emerged for real change."
However, the BIS struck an optimistic note about the global financial system, which it said was coping well so far with the sharp falls in asset prices.
The report said: "In the course of 2000, the bursting of the equity market bubble, the repricing of credit risk and the uncertain outlook for supply conditions in major government bond markets gave rise to concerns. In the event, markets appear to have responded relatively smoothly."