Outlook: Fears of Asian contagion subside

At last, a useful corrective to the fashion for predicting that Asia's financial meltdown spells doom for the rest of the world. It spells, if not doom then possibly recession for Asia, say the cool heads at the OECD. For the rest, the crisis comes as a rather useful counterweight to the danger of overheating. Certainly, the sharp slowdown in South-east Asia will slow exports from the rest of the world and worsen the European and US trade position. But there need be next to no impact on growth and inflation as long as central banks adjust interest rates appropriately.

Does this rather contrarian view in the semi-annual Economic Outlook make sense? On the evidence so far, yes. The Federal Reserve has already held off raising US interest rates when many analysts expected an increase, and it is likely to leave rates unchanged when it meets again today. As indicator after indicator of domestic inflationary pressure starts to flash red, this can only be a reaction to the potential spillover from Asia.

There is also a growing sentiment that the Bank of England will not increase UK rates any further - a view shared by the OECD, which sees Britain coming in for a soft landing. The Bank's Monetary Policy Committee appears to be waiting for firmer evidence on the export front, which is where the first symptoms of "Asian flu" afflicting the British economy would manifest themselves.

The view that collateral damage on the rest of the world would be limited got several further boost yesterday from within Asia. Korea said it would allow its currency to float, which traders said would get the pain of devaluation over quickly and allow the won to stabilise, rather than dragging out the decline over several more weeks or months. A package of tax-cuts started to take shape in Japan, with details due today. Even Mahathir Mohamad, the motormouth Malaysian Prime Minister, admitted that the Asian countries had made some economic policy mistakes.

He, and other Asean leaders, still criticised the West for not doing enough to help sort out the crisis. No thanks there for the near-$100bn in emergency credit arranged for South-east Asia in the space of five months. But the assorted grumblers ought to be even more grateful that the Fed and other central banks are not maniacs for financial orthodoxy at all costs, as they are so often portrayed.

This is not to say that there is no danger of the financial meltdown worsening, getting beyond the control of the central bank firefighters. Of course catastrophe is possible. It is just not the most probable outlook.