A drop in US consumer spending and the unravelling of the Argentine economy are the two black clouds on the global economy for the remainder of this year.
Zurich Financial Services global chief economist David Hale says either could trigger events that would lead to a global recession.
“US consumer spending is the issue we have to watch,” he says. ” If the consumer sector throws in the towel and stops spending, then we cannot avert a full-scale recession.”
If the US went into recession there would be a knock-on effect in many countries, including Australia, he warns. The recent rate cuts in the US have served to avoid this scenario, and Hale claims Alan Greenspan has become “spooked” by a slowing economy.
This slowing has lead economists in the US to put the country’s growth at 3 to 3.5 per cent for this year. However, the economy could be stimulated by President George W Bush’s $US1.3 trillion tax cut in September.
“The US economy does offer hope and therefore a better investment market,” Hale says.
Meanwhile, the Argentinean economy is beset by high overseas borrowings and a dependence on resources, a situation not too dissimilar to Australia.
“The high borrowings has raised the question of how Argentina will service its debt,” Hale says.
Most of Argentina’s foreign debt is in bonds, in fact the country holds 25 per cent of the world’s tradeable debt (bonds).
Hale says if Argentina were to default, this would hit the rest of Latin America’s economy and that would have a knock-on effect for the US economy.
However, it is believed the global holders of Argentina’s tradeable debt are talking about restructuring to avoid the country defaulting.
“Investors have learnt from the Asian economic crisis where countries’ debt was allowed to default,” he says. “There is no way to predict what will happen, but I hope that the debt will be restructured.”
Hale is optimistic on Europe as the tech-crash hasn’t hit that region as badly as the US. The growth rate for Europe is tipped at 2.5 per cent this year with further interest rate cuts due to stimulate the economy, especially in Germany.
