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OECD Estimates U.S. to Grow 4.7% This Year
May 12, 2004
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A robust recovery driven by productivity and tax cuts puts the U.S. economy on track for growth of 4.7 percent this year and 3.7 percent next, the Organization for Economic Cooperation and Development (OECD) reported.

The figure for 2004 shows a significant 0.5-point increase from the growth being forecast by the OECD 6 months ago when it forecasted growth of 4.2 percent. However, its latest forecast for 2005 has been dropped to 3.7 percent from an earlier estimate of 3.8 percent.

"The expansion is now firmly established across most sectors of the economy, helped by continued stimulus from fiscal and monetary policies," the OECD reported.

OECD chief economist Jean-Philippe Cotis told a press conference later that concern about high oil prices had been overdone and that the price of oil was unlikely to constrain world economic growth. The OECD forecasts had been based on a Brent crude oil price of 32 dollars a barrel, he said.

The report made several references to a key concern of the so-called twin deficits, a big deficit on foreign trade and payments and on the federal budget widely regarded as posing serious problems for U.S. economic policymakers and also putting downward pressure on the dollar.

It said that the deficit on the external payments accounts had fallen recently, possibly because of the fall of the dollar in the last 2 years, and that the budget deficit was a factor for rate increases and would have to be corrected.

The OECD noted that the U.S. Federal Reserve central bank had kept its key federal funds interest rate at a low point of 1.0 percent since June, in a passage before the Fed recently signaled that the environment now pointed to tighter monetary conditions.

But the report said that in view of "very low inflation" and "impressive productivity gains," "a move towards a more neutral policy stance should begin during the second half of this year."

The OECD commented: "Interest rate increases could initially remain modest, allowing continued stimulus, as the output gap is expected to close only in early 2005."

The output gap is the difference between output by the economy and its potential output without generating inflation.

The OECD, projecting "robust growth," came close to suggesting that the U.S. economy, which grew by 3.1 percent last year, might approach the point of overheating next year.

But it was also at risk of faltering.

Growth was running at more than 4.0 percent a year, slightly above what the economy could sustain and was on track in the medium term to exceed its potential rate of non-inflationary growth of about 3.25 percent.

Strong growth and a big and rising budget deficit are factors putting interest rates on an upward curve, although any dip in job creation could undermine the recovery, the OECD warned in a 6-month review of industrialized economies.

The federal budget deficit would increase from 3.25 percent of output in 2003 to almost 4.25 percent in 2004, and would then edge down to slightly above 3.5 percent in 2005.

But, adjusted for the ups and downs of the economy, the deficit was set to remain above 4.0 percent of output, "which contributes to the projected rise in long-term interest rates."

Inflation as measured by the broad gross domestic product deflator would remain low at 1.7 percent this year and 1.6 percent next after 1.7 percent in 2003. In terms of consumer prices, it would be 2.3 percent this year and 2.0 percent next year after 2.3 percent in 2003.
The unemployment rate would fall from 6.0 percent last year to 5.5 percent in 2004 and 5.2 percent in 2005.

Increased spending power, boosted by tax cuts, were supporting U.S. consumer spending and "strong growth of productivity" was likely to drive investment and output. (AFP)

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