US flirts with recession, Australia plays hard to get

This could just be the one time where it's the US that catches the cold while Australia only sneezes.

The evidence of a significant downturn in the US verging on recession is everywhere; capital expenditure, inventory levels, employment, the state of the tech industry and the savings rate. Manufacturing is in recession already in the US while a fall off in hi-tech investment shows the technology sector's holding up of the economy is unwinding. (But talk of US stagflation in recent days is a little premature on the basis of just one month's figures.)

While many in the US including Federal Reserve Chairman Greenspan are hopeful the US economy will avoid recession and bounce back quickly from a slowdown, Chris Caton, chief economist at BT Funds Management, gave the optimists a history lesson this week. He says almost every recession since WW2 has been characterised by economists predicting a soft landing and that by the time there is agreement about recession, the economy has begun to recover from it.

The index of leading indicators which combines all these individual measures of economic health is already at a lower point than in the mid-nineties slowdown and fast approaching the depths of the early-90s recession.

Except for Canada, no country's GDP movements correlate more highly with that of the US than Australia's at 84 per cent. If we are handcuffed to to US economic conditions, then this does not augur well for our chances of avoiding recession.

However, the one factor that will help offset this drag down is our low dollar. Exports have never been higher and our currency has never been lower, at least in US dollar terms, lifting our competitiveness and helping insulate us from the worst of any global slowdown.