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OECD sees 4% growth for U.S.


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PARIS (Reuters) -- Growth in the U.S. economy is set to moderate in the coming quarters but should continue at a rate of close to 4 percent as consumption and investment provide support, the OECD says.

The Paris-based Organization for Economic Cooperation and Development (OECD) forecast Wednesday the world's largest economy would grow by 4.2 percent next year, after a 2.9 percent clip in 2003.

The report comes a day after the U.S. government said gross domestic product rose 8.2 percent in the third quarter, its highest rate in about 20 years. The National Association for Business Economics also said it expects U.S. GDP to rise to 4.5 percent in 2004, which would mark the highest rate since 1984.

In its twice-yearly Economic Outlook, the OECD said, "The momentum from consumption and investment should keep real GDP expanding at a rate of close to 4 percent even as federal purchases decelerate in 2005 after the current round of spending increases has run its course."

With the stimulus from recent income tax cuts fading, consumption expenditure was expected to grow more modestly during the next year before picking up in 2005 in response to a better job situation and faster income growth, it said.

An acceleration in global demand and the depreciation of the dollar were expected to reduce a drag from net exports on growth while recent rapid productivity growth bode well for future investment, it said.

Risks to the outlook were posed by possibly weaker consumption if firms were to remain cautious about hiring or if unfulfilled profit expectations reduced stock market valuations.

"There are substantial risks to the outlook, although they appear more evenly balanced now than half a year ago," it said.

The government's tax cuts and a rise in military expenditures had boosted demand but also led to a deterioration in government finances, inflating the federal deficit, it said.

Forex risk rising

"The sharp rises in the federal budget and current-account deficits increase the risk of disorderly exchange-rate movements and a larger rise in long-term interest rates than projected," the organization said.

On the upside, however, strong productivity could spark optimism about business profits and personal incomes, fueling investment and spending, it said.

The OECD said production had grown rapidly while until recently employment continued to decline, leading to a pronounced divergence between labor and product markets.

"The strong productivity growth implied by this divergence, as well as the rebound in corporate profits, bodes well for future business investment," it said.

It added that despite the productivity gains, firms would likely need to expand payrolls soon to meet demand.

Turning to monetary policies, the OECD said the risks of a renewed stalling of the recovery should subside since demand was projected to advance briskly over the coming quarters.

"A move towards a more policy-neutral stance should therefore begin during the first half of 2004, but interest rate increases should initially remain modest as the output gap is expected to close only by late 2004 and inflation to remain at the lower end of acceptable range," it said.

The OECD said the U.S. government needs to adjust current policies towards balancing a swelling budget deficit to cope with impending demographic pressures.

With high military expenses and lower federal revenues due to tax cuts, outlays were set to outgrow revenue in the near-term, with the federal deficit set to widen to almost 4.5 percent in 2004 from 3.5 percent of gross domestic product in 2003.

"The growing deficit contributes importantly to the projected rise in long-term interest rates," it said.


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