ECONOMICS THE WEEK IN VIEW: Fed report will show US in 'a sweet spot'

US Federal Reserve Chairman Alan Greenspan's semi-annual report to Congress, known as the Humphrey Hawkins testimony, dominates the economic agenda this week.

In his testimony, scheduled for Wednesday and Thursday, Mr Greenspan will outline the Fed's views on growth and interest rates in the world's biggest economy.

Mr Greenspan's success so far in getting the economy to run at a healthy non-inflationary clip was confirmed once again last week by several economic reports, making it more likely that rates will be left unchanged in the near term.

US consumer prices barely budged in January, rising just 0.1 per cent on the month, while a drop in December exports helped widen the trade deficit to a record.

"We're in a sweet spot," said Scott Brown, an economist at Raymond James in Florida. "The economy is growing moderately with little sign of inflation."

The drop in exports, which may be the first indication that the strong dollar is hurting overseas trade, does raise the question whether authorities can allow the dollar's ascent to continue.

The benefits of a weak currency are becoming apparent in Germany, Europe's leading economy, where export-led demand looks set to finally kickstart a recovery.

Reports last week showed business confidence in west Germany rose to its highest level since June 1995, while the Bundesbank reported M3 money supply growth of 11.7 per cent, auguring stronger economic expansion.

The improvement in business confidence probably reflected greater hopes among exporters, economists said, after the mark fell to a 34-month low against the dollar last week.

The money supply growth was, however, higher than expected and confirmed the Bundesbank's stance that any further cuts in interest rates are not necessary and could threaten future inflation.

This week, four leading German states report their preliminary estimates for February price inflation. In addition, the forward-looking producer price index will be published, as well as import prices for January.

Import prices are likely to have jumped last month, reflecting the recent weakness of the mark. Investors expect a rise of around 0.5 per cent on the month.

In Southern Europe, Italy remains in the spotlight. The country reported positive inflation figures for February last week, with the annual rate falling to 2.2 per cent, the lowest level since 1969, from 2.6 per cent in January.

That's unlikely to help Prime minister Romano Prodi, however, as he tries to negotiate an early agreement with his coalition partners on the 1998 Budget - part of the effort to cut the budget deficit to qualify for the single currency.

If an accord can't be reached, Mr Prodi has promised the EU he will produce a "convergence plan" to demonstrate that the country is on track to qualify. Copyright: IOS & Bloomberg

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