Financial Daily from THE HINDU group of publications
Sunday, Jan 02, 2005
Financial Daily from THE HINDU group of publications Sunday, Jan 02, 2005 |
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Industry & Economy
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Economy `US economic expansion to continue this year' Sudhanshu Ranade
Chennai , Jan. 1 ACCORDING to a forecast put out by the Bush Administration last month, the GDP of the US will grow at a real, inflation-adjusted rate of 3.5 per cent in 2005; as compared to the International Monetary Fund projection of 2.3 per cent for Japan and 2.5 per cent for the European Union. Even if these expectations materialise, it would mean that India, with a projected growth of 6 to 7 per cent, would continue to narrow the gap between itself and the developed countries. Already, according to one estimate, India has the fourth largest GDP in the world, after the US, China and Japan. One of the major economic worries of 2004 — that rising oil prices would bring the US and global economies to the brink of a slump — has not materialised. The impact of surging oil prices on output and inflation has been modest. Current oil prices adjusted for inflation, one economist pointed out, are only about half of what they were in the early 1980s. One of the factors contributing to this is that industrialised countries today use only about half as much energy per unit of GDP as they were using 25 years ago. The risk posed to the US economy by possible terrorist attacks, said another economist, was higher than that arising out of the prospect of higher oil prices. But, he went on to add, "looking at the experience of Israel which had learned to live with terrorist threats," the US economy was likely to make its way through with only slightly reduced growth in the event of one or more attacks, so long as these were relatively limited in scope. The rest of the world is likely to benefit as a result of faster US growth, notwithstanding the steep decline in the value of the dollar which makes imports into the US more costly for consumers there. However, as the Fed continues to push interest rates up, short-term rates in emerging markets are likely to rise. Monetary authorities in a number of countries, particularly in Latin America, which are among the largest borrowers, might feel pressured to raise short-term interest rates to keep investors from opting for safer US assets. In turn, higher rates of interest will act as a damper on growth in the concerned countries.
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