US cuts to have knock-on effect

AUSTRALIA'S economy is expected to remain resilient despite the global impact of the automatic spending cuts in the US when they kick in overnight Friday, analysts say, following a warning from the International Monetary Fund that growth forecasts could be cut.

AUSTRALIA'S economy is expected to remain resilient despite the global impact of the automatic spending cuts in the US when they kick in overnight Friday, analysts say, following a warning from the International Monetary Fund that growth forecasts could be cut.

The $US85 billion ($A83.23 billion) in cuts across government agencies over seven months - also known as sequestration - could shave at least 50 basis points off the IMF's current forecast of 2 per cent growth for the US economy, a spokesman for the world body said.

"We will see what happens on Friday, but everybody is assuming that sequestration is going to take effect," IMF spokesman William Murray said. "What it means is that we are going to have to re-evaluate our growth forecasts for the United States and other forecasts."

JPMorgan economist Tom Kennedy said much of the impact on Australia would come through a few of the country's biggest trading partners, such as Japan and China.

"The issue is what is that going to mean for overall global demand. I don't think it is going to have a direct influence on Australia, but I think the impact that it has on Australia's major trading partners - that's the avenue where we are going to feel a slowdown," Mr Kennedy said. He said most economic forecasts had already factored in the impact of the sequester and analysts were anticipating "quite a soft year" for the world's largest economy.

"I don't think there are going to be any surprises. Our growth profile and the US growth profile already captures what the sequester means for the economy," he said.

While financial markets rose and sank as US politicians battled over the fiscal cliff late last year, the sequester is having less of an impact on global stocks this time around.

CommSec's Steven Daghlian said conditions now were more positive, with the S&P/ASX 200 Index and the broader All Ordinaries Index passing the previously elusive 5000-mark.

"The markets have been having a good run this year. In November, the market was up a third of a per cent, in December it was up 3 per cent, but this year, it's been up 5 per cent in January and up 4½ per cent in February," Mr Daghlian said. "Having said that, if things go pear-shaped in the US, then that could certainly change. But for now, the market's being quite bullish."

Mr Kennedy said the fiscal cliff was a hit to both government and consumer spending. Since then, most of the tax cuts and tax break issues have been addressed.

"I don't think the sequester argument has the ability to put such a drag on growth that the whole fiscal cliff scenario did," he said. "The market expects this to generally unwind over the next 10 years or so. I think they're getting used to a lower level of government spending."

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