American economy at risk of overheating

Fears of renewed turbulence on the world's financial markets grew yesterday after it emerged that the head of the US Federal Reserve had told Western finance ministers he could not rule out a crash for the American economy.

Alan Greenspan recently told ministers of the seven richest nations it was impossible to dismiss the possibility that the US economy could overheat, but said he did not think that was a danger now, according to reports yesterday.

The revelation came as shares in Tokyo, the only major market open on Good Friday, suffered a 4 per cent slump on its main blue-chip index.

The Fed chief spoke "very frankly" about the risks for the US economy, Business Week quoted Italian Treasury Minister Giuliano Amato as saying after he met with Mr Greenspan and other central bankers and finance ministers at the G7 meetings last weekend.

The discussions were held against a background of sharp falls in global shares, after official figures showed US underlying inflation rose in March at its fastest pace in five years. The news sparked fears that the Fed would raise interest rates by 0.5 per cent rather than the quarter-point already discounted by the markets.

Meanwhile, the Nikkei 225 index plunged in the final hours of trading yesterday. In the last 30 minutes of dealing, the index dived almost 5 per cent before recovering to close down 3.73 per cent at 18,252.68.

Analysts stressed that the fall was largely due to insecurity ahead of a reshuffle in membership of the index next week. In contrast, most other Tokyo stock indices rose. The day left the Nikkei investors nursing their worst weekly loss since September 1990 - an 11 per cent fall.

Traders said they hoped the Nikkei would recover next week as institutions used the cash from yesterday's sales to buy-up the new entrants.

The focus shifts to Europe and the US in the coming week. GDP figures in the US and UK for the first three months of 2000 will be announced, with economists looking for signs of a gentle slowdown.

US data on Thursday are expected to show a fall from the previous quarter's blistering 7.3 per cent to 5.8 per cent. Figures for the UK, out on Friday, are forecast to show a slowdown in quarterly growth to 0.7 per cent from 0.8 per cent, following recent figures showing that the manufacturing sector is struggling.

The European Central Bank meets on Thursday to decide whether to raise interest rates.