US ready to emerge from 'soft patch' – Greenspan

Alan Greenspan predicted yesterday that the US economy was poised to emerge from its current "soft patch" into a spell of stronger growth next year, Iraq and major terrorist strikes permitting.

In his regular annual speech to the Economic Club of New York, the Federal Reserve chairman said the latest economic data suggested the economy had been working its way through a soft patch, "and the patch certainly has been soft". But he signalled that the fundamentals were in place for recovery, citing resilient consumer demand, healthier corporate balance sheets, and continuing gains in productivity.

All that was missing was an improvement in business investment, held down by the threat of a new Gulf war and a surge in oil prices. But a "reduction in geopolitical risk" would boost investment, which Mr Greenspan called "the indispensable spur to increased economic growth".

The latest data supports the Fed chief's case. After expanding at a brisk 4 per cent pace in the third quarter, GDP is reckoned to have grown by half that amount or less in the final three months of this year, not least because of a thus far lacklustre Christmas retail season.

For 2003 analysts expect growth of between 2 and 3 per cent, depending in part on how the Iraq crisis unfolds. But even the low end of those expectations imply the US next year will perform better than the anaemic European and Japanese economy.

Mr Greenspan's remarks, which suggested that the Fed will keep short term interest rates at their current historic lows for the immediate future, helped push the Dow Jones index almost 100 points higher in early trading.

The Fed chairman was notably sanguine about two widely touted risks to growth, the high level of consumer debt, and the danger that the US economy could sink into deflation – a downward spiral in which falling prices cause consumers to delay purchases, and increase the cost of debt.

"The United States is nowhere close to sliding into a pernicious deflation," he declared, insisting that when the central bank cut its overnight lending rate to a 44-year low of 1.25 per cent last month "it was not because there was significant and mounting evidence that deflation was coming upon us".

And, he added, the Fed was "extraordinary sensitive" to the issue.

Nor was Mr Greenspan overworried by the high rate of household debt to income. This had been mitigated by mortgage refinancing, which he believed, was likely to extend into 2003.

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