Australia Faces Turbulence From US Meltdown : PM

Source: The Business Times, October 29, 2007

Australia, one of the best-performing advanced economies, faces looming economic turbulence from the sub-prime lending meltdown in the United States, Prime Minister John Howard warned yesterday.

Last Friday, Australian Treasurer Peter Costello had warned of an approaching international financial ‘tsunami’, with China at its epicentre.

‘We are entering a more difficult time of economic management. There are storm clouds on the international economic horizon,’ Mr Howard told Channel 9 television yesterday.

He was speaking on the campaign trail for Australia’s federal election on Nov 24, which the coalition government is fighting largely on its economic credentials.

Battling poor opinion polls, Mr Howard faces the prospect of an official interest rate increase by the Reserve Bank on Nov 6, during the election campaign.

‘I don’t think it’s panicking anybody to say that the sub-prime meltdown in the United States, which has already had an impact on market interest rates, because of the globalised nature of our economy, is going to have an effect,’ he said.

In an interview with the Sydney Morning Herald last Friday, Mr Costello said global financial markets face a ‘huge tsunami’.

The US economy would weaken in the wake of its sub-prime mortgage meltdown, and the breakneck pace of Chinese growth also could not continue, Mr Costello said.

At some stage, likely to coincide with a move to a floating of the Chinese currency, China would unleash greater instability on global markets than the United States had, he said.

‘That will be a wild ride when it happens. That will set off a huge tsunami that will go through world financial markets,’ said Mr Costello, one of Australia’s longest-serving treasurers.

Yesterday, Mr Howard pledged to keep interest rates down in Australia, but admitted that rates could rise.

‘The (Reserve) Bank will make a decision on interest rates . . . Interest rate changes happen, they go up and they go down, according to economic circumstances,’ he said.-- Reuters