RIYADH, 2 July 2004 — The clouds of a dismal economy seem to be parting and the silver lining of a slow but steady recovery is making its mark. Last week was a reverse of all the weak economic recovery jargon being used over the last few weeks. Although the data was nothing to cheer about, however, expectations are strong that the US economy is going on the right path.
The most important indicator of economic performance; gross domestic product (GDP), which measures all that is produced in the country’s borders, was released last week. In its report the Commerce Department cited the 2nd quarter US GDP came below expectations.
After clocking a 4.5 percent growth rate in the first quarter, the US economy slowed down to 3 percent in the second quarter below expectations of a 3.7 percent growth. The slowdown was blamed over the significantly high energy prices, causing a drag on consumer spending, which counts for the largest portion of the GDP equation slowed down this quarter.
However, investors and analysts alike expect this to be just a small bump on the road to solid but steady growth.
Further more, the White House published a report on the budget and revised this year’s fiscal budget deficit to a record $445 billion. The number is much different from the $374 billion for 2003. Although the budgeted figure breaks all records, it is still lower that the $521 billion forecasted by the White House in February 2004.
The White House claims that the tone down of the budget is due to the tax breaks helping to restore the economic fabric. However, amid the election campaign, the opposition dedicates this figure to the downfall of the US economy and calls out “failed Policies” of the current government. Now back to economics, the IMF in its periodic assessment of the US economy also indicated that the US economy was on track to stable economic growth “despite hitting a soft spot.”
The IMF expects the US economy to continue strengthening in the second half of the year, however the report raised concerns about the bloating current account deficit keeping a tab on the recovery. In the mean time the white house revised higher its growth forecast for the US economy. It forecasts the US economy to grow 4.7 percent this year (from 4.4 percent previously estimated) on a year over year basis, while 2005 will see a growth rate of 3.7 percent (from 3.6 percent previously estimated).
The white house also expects that the unemployment rate would also be cut down to 5.5 percent in 2004 from 5.6 percent estimated before. Although the signals are weak but expectations are high for growth in the $10 trillion US economy.
Positive expectations coupled with a measured pace of the Fed to take action in tightening its monetary policy given stable or manageable inflation will play a major role in putting the economy into the right perspective.
However, risks like the sky rocketing oil prices, current account deficit and geopolitical concerns may still keep the US economy from reaching its potential.
(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)