According to the report issued by the US Council of Economic Advisers on November 21, the US Government has revised down the expected economic growth rate over three years - 3.1 per cent for 2006, 2.9 per cent for 2007 and 3.1 per cent for 2008.

The original projections were 3.6 per cent in 2006, 3.3 per cent in 2007 and 3.2 per cent in 2008.

The revision is obviously connected to the current sliding of the growth rate of the US economy.

After going through seasonal adjustment, the growth rate of the US economy in the third quarter of this year registered merely 1.6 per cent, a record low since the first quarter of 2003. The growth rate stood at 5.6 per cent for the first quarter and 2.6 per cent for the second quarter.

The likelihood of the US economy's making a hard landing increases against this context. Moreover, a medium-term stagnation could come in 2007. The expected growth rate could be downgraded further, taking into account the deteriorating economic situation.

The cooling off of the US real estate market is the major factor in explaining the retuning of the expected economic growth rate figures.

At present, almost all the indicators related to the US land property market are going down dramatically. Housing construction in the second quarter of this year, for example, dropped by 11.1 per cent, and the third quarter by 17.4 per cent compared with the same periods last year.

The second-hand housing deals, which are the mainstay in the property transactions in the United States, declined 12.7 per cent in the third quarter compared with the same period of last year. And the housing price was down 1.2 per cent year-on-year.

The main indicators show that the land-property bubble bursting will continue.

US economist Nouriel Roubini estimates that the slowing down of the investment in real estate may bring down the US GDP growth rate by two percentage points.

As real estate makes up a very large portion in the wealth of American families, the sliding of real estate prices is expected to bring about negative effects greater than those when the stock bubbles burst in 2001. This will continue to keep US consumer demand down.

Worse still, the winter in the US real estate market will add significant pressure on employment, considering that people hired in the real estate sector since 2001 have accounted for 30 per cent to 40 per cent of the employment increase in the United States.

At the same time, oil price hikes on the international petroleum market threaten to bring inflation pressures onto the US economy.

This year, oil prices started to drop by large margins after it reached the peak of US$75 per barrel. But currently, it has gone back to no higher than US$60 a barrel.

With regard to supply, the OPEC members will continue to reduce supply by curbing production. Non-OPEC oil-producing countries are unlikely to increase petroleum output, driven by the desire to reap maximum profits from their exports.

On the demand side, the oil demand of developed countries and the large developing nations, including China and India, remains large.

In addition, the US dollar looks set to devalue in the medium term. And the oil-rich Middle East remains unstable in geopolitical terms.

All these factors combine to determine that the oil price will stay high for a fairly long time to come.

The high oil price puts inflationary pressure on the US economy and intensifies the current account deficits. The inflation caused by economic factors from outside cannot be cured by the means applied to deal with the inflation caused by interior factors. That the exterior factor triggers inflation does not mean that the US economy is in the booming period or is becoming overheated.

Apparently, the US Federal Reserve System has failed to heed the nature of the first type of inflation, in the opinion of this author, and just keeps increasing the interest rate.

It should be admitted that the continuous interest-rate rise is responsible for the dropping of the growth rate of the US economy and the sliding of the real estate market.

Apart from property market decline, high oil prices and high interest rates, two other factors should be reckoned with.

The first is the ageing US population, which is made all the more serious by the United States' tightening immigration inflow in the context of anti-terror campaigns. This makes the chronic short supply of labour force all the worse.

Second, fiscal deficits and current account deficits are showing no signs of making a turn for the better. This exerts pressure on the US dollar to devalue in the medium and long term.

Once the value of the dollar plummets by large margins, the United States will be forced to raise the interest rate dramatically to keep the assets in US dollars attractive. This would constitute the triggering factor for the dwindling of the assets market and for economic stagnation.

In the scenario of the hard landing of the US economy, other countries' economies would not be able to remain intact.

The decline of the economy of the United States, which is the world's largest market for imports and the No 1 recipient of foreign direct investment, would negatively impact other economies.

As a result, other countries should help cushion the devastating impact of the possible hard landing made by the US economy by orchestrating their macroeconomic policies and carrying out their own economic structural reforms.

The author is a researcher proceeding to doctoral degree at the Institute of World Economics and Politics under the Chinese Academy of Social Sciences.

Source: China Daily