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DJ INTERVIEW: US In Recession; Mild World Impact-RBA's McKibbin

By James Glynn
Of DOW JONES NEWSWIRES

SYDNEY (Dow Jones)--The U.S. economy is almost certainly already in recession, but the impact on the global economy from the U.S. downturn is likely
to be limited, Warwick McKibbin, economist and member of the Reserve Bank of Australia's policy-making board said Thursday.
"There is a hard road ahead for the U.S. But I think the rest of the world can ride through it," he told Dow Jones Newswires in an interview.
McKibbin wouldn't comment directly on Australia's economy or Australian monetary policy, but his comments reaffirm that the RBA remains more concerned
about domestic inflation than the impact on Australia's economy of any global downturn.
Cutting U.S. interest rates won't avert a recession as the economic slump "has already happened."
"What is surprising is the extent to which it has not carried over to the rest of the world," he said.
The current crisis confronting the U.S. economy is unlike previous trouble pots like the dot-com bust in 2001, which had direct linkages to Asian
economies.
"This is not like then, this is a slowdown caused by an excess of housing in the U.S. I think Asian economies are going to be less impacted than they were in
2001," he said. "I'm still reasonably comfortable that as long as policy makers respond they can offset spill-overs to other countries" coming from a reduction
in trade.
"U.S. rate cuts will help but what is fundamentally wrong is that you have got an excess construction of physical assets (in the U.S. housing sector), and
not to mention a fairly substantial change in the valuation of those assets," he said.
The nine-member RBA board met Tuesday and agreed to the third interest rate hike since the start of the U.S. subprime mortgage crisis in July.
RBA Governor Glenn Stevens said concerns about global growth were weighed against a worsening domestic inflation outlook ahead of the decision.

Ultimately, the domestic price risks won out and the RBA raised its official cash rate target to an 11-year high of 7.00% from 6.75%, with many analysts
expecting a further rate hike in coming months.

Europe Starting To Slow, Financial Shocks Possible

Still, McKibbin was far from dismissive of the darkening global economic backdrop. Recent data from Europe shows growth in the region is slowing and
banking sector shocks remain highly likely, he said. "The problem is that data coming out from Europe now is looking a lot weaker
than I would have expected...it is a lot more troubling," he said.
McKibbin said a lot of uncertainty surrounds the banking sector. If shocks to the world economy are likely, they are more likely to be transmitted by finance
sector upheavals than via trade links.
"Financial contagion is happening, and that's more worrying than just a spill over from trade. That is a much bigger problem," he said.
"We don't understand the financial crisis very well at all. And we don't understand what the psychological responses will be to these various types of
shocks," he said.
"The big concern for me is when these types of financial problems spill over to the very large developing countries - places like Latin America - that kind of
effect now is much larger than it was in the 1970s," he said.
McKibbin said the more globalized world economy would help soften the emergence of a broader financial crisis.
Greater coordination between major central banks and governments was needed to effectively deal with the approaching world growth slowdown, he said. But the
policy response by central banks and governments so far was adequate.