When George W Bush is sworn in as the United States of America’s 43rd president on January 20, the event will be tinged with sourness. The long disputed election ensured that the administration would get off to a less than triumphal start, with the president lacking a clear electoral mandate.
Mr Bush promised the electors that he would extend prosperity, improve the national education system, guarantee the solvency of state pensions and increase spending on healthcare for the elderly. He also campaigned on a tax cut of US$1,300bn which would trim tax rates across the board, but a smaller tax cut package is now expected. Although Republicans have retained control of the House of Representatives, the Senate is split evenly between Republicans and Democrats, which will cause headaches in securing the 60% of votes needed to pass legislation.
The new president also faces tough challenges on foreign policy. He acknowledges that the US must accept a world leadership role and respond to conflicts abroad. But whether he chooses an activist approach and intervenes when American values are under threat, or a more conservative policy which engages US troops only when national interests are directly threatened, he will find that in reality the issues will be less easily classified.
Analysts at The Economist Intelligence Unit (EIU) argue that, as well as setting the wider political and military rules of foreign policy, he will also face a host of regional problems, ‘from containing the Palestinian/ Israeli conflict; defrosting relations with North Korea; to promoting economic ties with China; and rebuilding relations with the EU‘.
The team picked by Mr Bush ‘resurrects the Republican past but has the diversity that the party’s moderates would like to think is the Republican future,’ comments the Financial Times.
The economy is already becoming more fragile. In recent years the US has enjoyed a ‘goldilocks’ economy, with growth consistently higher than forecast and inflation under control despite record low unemployment.
But as long ago as last May, Barclays was warning in its Country Report: USA of ‘significant risks’ building in the US economy. Despite the spread of IT, with higher productivity, faster potential growth, and greater price stability, signs of overheating were becoming apparent. By then the economy had completed three years of very high output growth, with increases of 4% per year.
The expansion which began in 1991 was the longest in the nation’s history; it was based on strong investment through the 1990s and more recently by high consumer spending, underpinned by low interest rates, growing real incomes and increases in personal wealth. But the financial asset values became excessive and government policy turned to deflating the ‘bubble’. Third quarter 2000 growth was 2.4% at an annualised rate, down from 5.6% in the second quarter.
Towards the end of last year the boom slowed to a more sustainable pace and the omens pointed to a ‘soft landing’. Zanny Minton-Beddoes, writing in The World in 2001, observes that ‘the biggest surprise in keeping the party going in 2000 was that foreign investors kept pouring money into America’s economy’, even as the current account deficit broke historic records, at 4.3% of GDP.
By the early weeks of 2001 evidence emerged that the tables had turned decisively, with claims for unemployment insurance markedly up, tumbling consumer confidence and retail sales, capital goods orders falling, and stock markets down.
The question now is whether the slowdown will become a recession, the latter being defined as two successive quarters of negative growth. Factors which support the likelihood of a recession include falling household net worth and low consumer confidence; an increase in jobless numbers; a sharp downturn in manufacturing; the threat of a low savings rate and uncertain foreign investment flows.
Factors indicating that a recession will be avoided include continued, albeit drastically reduced, economic growth; unemployment still close to an all-time low of 4.9%; tax cuts will provide the required boost to consumer spending; and the recent surprise cut in interest rates by the central bank’s Alan Greenspan.
Yet the wisdom of the Federal Reserve’s cut in interest rates has split economists. Faisal Islam asks in The Observer: ‘Was it too late, was it panic, or was it another stunning manoeuvre by the sage of global macro-economics?’ At present there are almost as many different views on the possibility of a ‘hard’ versus ‘soft’ landing as there are economists giving them. In its most recent forecast the EIU projects GDP growth of 3.2% in 2001, as the effects of earlier monetary tightening begin to bite; Barclays forecasts 3% growth this year. If either prove to be correct, the US will have achieved a necessary slowdown in its economy, without inflicting serious damage on the rest of the world.
