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Davos: Economists and business split over scale of market crisis

Rice: US economy to continue drive global growth. As economic confidence took a further battering Wednesday in Davos.

“The US economy is resilient, its structure is sound, and its long-term economic fundamentals are healthy,” Rice told a plenary of the World Economic Forum annual meeting, which opened on Wednesday with the participation of world political and business leaders. “The United States continues to welcome foreign investment and free trade. And our economy will remain a leading engine of global economic growth,” she said. “So we should have confidence in the underlying strength of the global economy,” she added.

As economic confidence took a further battering Wednesday, the question repeatedly asked by politicians, business leaders and economists in Davos was how long a US recession might last and how would it affect the rest of the world. US economist Nouriel Roubini was quoted saying that, in this case, the US was going to have not just a cold but a protracted case of pneumonia. Chairman and CEO James Dimon of the US global financial services group JPMorgan Chase & Co said: “Financial crises have happened every five years in the past 100 years and they have all been resolved.” He doubted that policy makers had the necessary tools to stop recession but might mitigate it. US economist Fred Bergsten said even if the US went into recession the rest of the world was now “decoupled” to the extent that any spillover damage would be limited. “When the US catches a cold now, maybe the rest of the world gets the sniffles - but certainly not pneumonia, and I’m not even certain the world catches a cold either,” he said. The emerging markets such as those of India and China now accounted for half the world economy. “Even if they slow down one percentage point they are still going to be growing at 6 to 7%,” added Bergsten.

International financier George Soros believed there would be a significant shift of power and influence away from the US in particular and a shift in favor of the developing world, particularly China. Soros, who made $1 billion betting on the devaluation of the British pound in 1992, said in a BBC interview at Davos that recession would be “very difficult to avoid in the US and in Britain.”

US economy to keep slow growth in 2008
The US economy will keep a slow growth in 2008 instead of slipping into a recession, a famous Chinese economist said in Davos on Wednesday. Some American experts forecast a 2.8% growth of the US economy in the coming year, said Cheng Siwei at a panel session of the World Economic Forum annual meeting. “I cannot comment whether that target can be met, but I believe the US economy will keep growing,” said the Chinese economist, who is also vice chairman of the Standing Committee of the National People’s Congress of China. But Cheng also expressed concerns about the US economic performance this year, as uncertainties rise because of the sub-prime mortgage loan crisis. “The US economy has a strong impact on the world, and the influence of the sub-prime loan crisis is still there,” he said. He added that the weak dollar and the US general elections this year would both have influence on the country’s economic prospects.

Cheng also played down expectations that China’s economic growth can, in some way, offset the impact of a possible US recession to the world economy. “China’s GDP accounts for only 5-6% of the world economy, and that proportion is much smaller than the United States,” Cheng told Xinhua. It’s true that China’s contribution to world economic growth is increasing, but its capability should not be overestimated, he said. According to the economist, China’s major task in 2008 is to avoid economic overheating and inflation. He expected China’s economic growth to slow down to below 10% this year, as the government would use more resources for social security and public services. China’s foreign trade surplus is also likely to decrease, maybe as far as 20%, to some $90 billion due to the contraction of exports, he said.

Meanwhile a survey of global business leaders underscored a global split. It showed fear of a recession was the number one concern among CEO’s globally, for the first time in more than a decade. While business confidence had dropped dramatically in the US, down to 35% from 55% a year ago and also in Western Europe, it had surged among CEO’s in India, China and Russia. Samuel A DiPiazza, Global CEO of PricewaterhouseCoopers, which published the survey said it showed a “tale of two worlds.”

Up to 2500 politicians, business leaders, including 13 heads of central banks and leaders of international organizations are attending the five-day World Economic Forum, WEF, meeting in the Swiss mountain resort in eastern Switzerland. (xinhua, m&