Outlook: Early signs of autumn jitters in equity markets

NEVER ONES to stick their necks out, economists at the International Monetary Fund, watching the rapid recovery in Asia in the wake of the global financial meltdown a year ago, have concluded that world growth will be higher this year and next than they expected six months ago. In fact, the 1998/99 slowdown has turned out to be the gentlest of the four dips in growth during the past 30 years.

However, the view from these sunlit uplands is clouded. New figures yesterday showed the US trade deficit is yawning ever wider. This reflects the role played by the supersonic American economy in carrying the rest of the world so benignly through the crisis. It also signals the pent- up inflationary pressures from US growth, kept at bay so far by the strength of the dollar.

Unfortunately, the dollar is now on the slide, at least against the yen. A weaker dollar will help correct the trade imbalance, over time, but will also tend to boost inflation. And the corresponding gains in the yen threaten to derail the Japanese recovery, which in turn is needed to keep the rest of Asia growing too. The question facing the world's policymakers, gathering in Washington for this weekend's G7 meeting, is therefore how to achieve a gentle correction in the balance of growth and trade without triggering a currency market over-reaction.

One solution was barred by the Bank of Japan yesterday, with its firm refusal to do what everyone else in the world thinks it ought to, and loosen monetary policy through the good old Keynesian method of pumping cash into the economy. The Japanese government will agree to run a yet bigger budget deficit, but it is close to the limit of how much more it can achieve through fiscal stimulus. This is because any budget deficit judged to be unsustainable will raise long-term interest rates in the bond market thus counteracting the beneficial effects of the stimulus.

That puts the spotlight firmly on Alan Greenspan. Yet again the grand old man of central banker has been cast in the role of economic superman. The chances are he will raise US interest rates further in October. By slowing the economy, higher borrowing costs would help trim import growth. They should also help the dollar, or at least prevent it from falling too sharply.

However, even "Superspan" needs the occasional helping hand. American policymakers have said it time again; to solve the imbalances in the world economy, others must now take up the baton of growth and run with it. The weak euro is clearly aiding European recovery. Japan's central bank chief will have a lot of explaining to do at the weekend if he sticks to his guns. Meanwhile, a repeat showing of the now familiar autumn wobble in world equity markets looks all too possible. We may already be seeing its early signs.