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Health of the US Economy |
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| With Japan stagnating and EU adjusting
to its new monetary union, the US remains the linchpin
of the global economy. Some analysts have remarked that
"what happens in the US is make-or-break for the
world economy this year". The current US expansion
has entered its 92nd month, the longest peacetime expansion
since the 1850s. Rapid above-potential growth, however,
has led to some macroeconomic imbalances in the US economy.
The savings rate has turned negative. Current account
deficits are at a record high. The US economy is widely
expected to moderate to slower growth this year. This
is viewed as a welcome breather for the overheated economy. |
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| There are, however, several downside
risks to this projection for a soft landing in the US
economy. For one, a sharp correction in the US stock
market may push the US economy into a sharp contraction
rather than a benign easing. An estimated 40 per cent
of the average US household's net worth is in the stockmarket.
The negative wealth effect from a substantial correction
on Wall Street is potentially large. The OECD has estimated
that a 20 per cent fall in US equities could lead to
a 1 per cent reduction in US GDP as a result of lower
consumer spending. This does not account for the impact
on investments or the secondary knock-on effects, particularly
on global financial markets, which are likely to be
substantial. |
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| Aside from the equity risk, there
could also be significant repercussions on the US banking
sector and economy if Brazil falls into full-blown recession
and drags down the rest of Latin America. The US extended
51 per cent of its total overseas lending and directed
21 per cent of its exports to Latin American countries.
In terms of corporate exposure, 20 per cent of US' earnings
from direct investments abroad were derived from Latin
America. The linkages are significant and pose a potential
threat to the health of the US economy. |
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