US economic worries deepen

Events overnight put into sharp perspective the question at the heart of Australia’s economic future: will a strong China be enough to pull us through if the US economy takes a dive?

US Treasury Secretary Henry Paulson last night said that the international credit crunch caused by US sub-prime woes could last longer and have a deeper impact than had previously been expected.

Paulson says current market volatility is likely to “go on for a while” and could be worse than the Asian financial crisis, according to an Australian Financial Review report today.

The comments reaffirm the likelihood of an interest rate cut in the US but also raise concerns about the ability of the US economy to ride out current conditions without slipping into recession.

Meanwhile, the World Bank yesterday lifted its prediction of China’s growth rate this year from 10.4% to 11.3% and said the booming nation is well placed to withstand or even benefit from current market instability, according to reports.

Inflation in China, which last month reached a 12-year high of 6.5%, is likely to ease in 2008, the World Bank says.

In Australia, the number of new homes and apartments being constructed fell 4% seasonally adjusted in the June quarter of 2007, according to Australian Bureau of Statistics figures released today.

Australian markets have steadied after an initial sharp climb this morning, with the S&P/ASX 200 up 0.1% on yesterday’s close to be 6229.0 at 12.40 pm. The Australian dollar was trading at US83.95¢ at 1.05 pm today, up from US83.58¢ at last night’s close.