For while the Iraq war and issues concerning the personal integrity of candidates have characterised the contest so far, it's a fair bet that come the presidential election in November, the top-of-the-list challenge will be the health of the US economy. Keeping "the economy, stupid" firmly in mind in 1992 enabled Bill Clinton to defeat George Bush Sr despite his 80 per cent approval rating 12 months out from the election. Heading into next year's poll, George W. Bush has a national approval rating of only 36 per cent, while the collapse of the sub-prime mortgage market threatens to tip the US economy into recession.

This makes the contest doubly difficult for the Republican Party, which enters the contest without a logical successor to Mr Bush, given that Vice-President Dick Cheney is not standing. In a party with a history of rewarding established frontrunners, at this point in the race there is no one to claim the title. This means that with voting due to start in the Iowa caucus on January 3, the White House race is considered to be more open than it has been for decades.

This has fed the personality-focused internal campaigns against the frontrunners on both sides. After an unflattering photograph appeared of former first lady Hillary Clinton, Americans were asked if they were ready to watch a female president age before their eyes. Senator Clinton's main rival, Barack Obamba, has had to contend with false reports he is a Muslim plant who spent at least four years in a madrassa, or Muslim seminary, in Indonesia. The leading Republican contender, former New York mayor Rudy Giuliani, has been stung by allegations that New York taxpayers helped to pay for his getaways with his then mistress, and now wife, Judith Nathan.

According to the latest polling by the Wall Street Journal, the smear campaign has cost Mr Giuliani the double-digit advantage he held over his nearest rivals six weeks ago. Mr Giuliani's gameplan has been to concentrate on winning Florida and then sweep Super Tuesday on February 5 to seal the Republican nomination. An alternative view is that he has lost momentum at the wrong time. Mr Giuliani is now equal with former Massachusetts governor Mitt Romney at 20 per cent of the vote, with former Arkansas governor Mike Huckabee trailing slightly at 17 per cent and within striking distance of the leaders. Arizona senator John McCain, the presidential candidate who has been most supportive of the Iraq war, is back in the race, polling 14 per cent.

The Democratic race is more stable but still wide open. Senator Clinton has maintained a 22 percentage point lead over Senator Obamba of Illinois. Both face competition from 2004 vice-presidential nominee John Edwards. Although Senator Clinton is way ahead in national opinion polls for the Democratic nomination, she is in a tight three-way fight with Mr Edwards and Senator Obama in the Iowa primary. And Senator Obama claims he is building momentum at just the right moment to take the lead.

The crucial vote for the Democrats is South Carolina on January 26, the first test of black votes in the election. One of Senator Obama's big problems is that, despite potentially becoming the US's first black president, African-Americans have not embraced him. This is why the public support he has received from television star Oprah Winfrey is considered crucial. If Senator Clinton does well in Iowa and New Hampshire and then takes South Carolina, it is possible Senator Obama could pull out of the race rather than risk losing the Super Tuesday elections badly, potentially spoiling his political chances forever.

Wealthy New York mayor Michael Bloomberg remains a wildcard in the presidential race, with claims he could spend up to $1 billion of his own money on a campaign. The absence of a firm leader from either major party leaves the contest more open for an independent to come through the middle. The uglier and more personal the contest becomes, the more voters are likely to switch off from party politics. Mr Bloomberg was a Democrat who changed sides to become New York mayor, and six months ago resigned from the Republican Party to open the way for a run to become president as an independent. Meanwhile, despite repeated denials, former Clinton vice-president Al Gore cannot be ruled out from making a late entry to the contest, should Senator Clinton be swamped by Senator Obama.

From Australia, it is impressive to see the US electoral process in action and heartening that there are so many people of merit prepared to enter the contest. At this stage, however, there is little policy detail on which to judge the candidates. The frontrunners will eventually have to make their views clear on the important domestic issues such as health care and education, and also take a stand on future US foreign policy and trade. Whoever wins, Australia can reasonably expect that the good relations enjoyed throughout the Bush era will continue. Our interests will always be best served by the US maintaining its active, outward-looking engagement in global affairs. It is reasonable to say, however, that the next president has a lot of work to do to rebuild the moral authority enjoyed by the US at the start of the Bush administration. It is also obvious that Mr Bush remains a lame-duck president and an unpopular figure despite the steady improvement in news from Iraq. Republicans do not refer to Mr Bush on the campaign trail, and keep well away from him in public.

Politically, the problem with Mr Bush is deeper than the mistakes he has made prosecuting what was a justified and now appears to be a winnable war in Iraq. It is that he has failed US conservatives on their own agenda. And as the candidates prepare to put the personal insults behind them and focus on the policies and issues that matter, they will confront an economy weakened by successive heavy budget deficits - and either on the edge or already in recession.