Outlook for '99: Washington - US fears for `Goldilocks'

The view from the world's economic hotspots

THE SO-CALLED "Goldilocks" economy - not too hot, not too cold, but just right - may be harder to keep warm in 1999. The Federal Reserve staved off the first chills of an Asia-caused downturn in September with its first interest rate cuts since January 1996. Three cuts sufficed for Wall Street to recoup most of its summer losses.

Thanks to the Fed, US investors go into 1999 with their optimism intact. But warnings about growth and profits, squeals from US manufacturers, and a big crop of job losses all hint at trouble to come. GDP growth is forecast almost to halve during 1999. Exports to Asia, already well down in most sectors, are set to fall further and exports to Latin America could follow. The National Association of Manufacturers predicts growth of just 2 per cent and has called for a 10 per cent tax cut across the board - a vain hope - to offset the decline.

To the 20 per cent job losses already announced at Boeing, consolidation in the communications, computer, automotive and petroleum sectors could produce a similar shake-out. Depressed wages at the lower end of the market will keep prices down, but if too few new jobs are created, unemployment will go up.

Two peripheral uncertainties make 1999 especially hard to call for the US. One stems from the introduction of the euro which, if weak, could benefit the dollar, but if strong could force adjustments in central bank reserves round the world, causing a dollar sell-off.

The other stems from the insatiable appetite of small US investors for shares in internet companies. If the internet "bubble" bursts, it could spark wider selling on Wall Street.

"Goldilocks" has defied all the doom-mongers so far. But should confidence falter, the crash could be hard and far-reaching not just economically but, given Bill Clinton's difficulties, politically too.