- The Washington Times - Wednesday, December 1, 2004

The Organization for Economic Cooperation and Development (OECD), which includes 30 democratic and market-oriented nations, issued its semi-annual forecast Tuesday projecting a rather significant deceleration of economic growth among its members for next year. Perhaps even more worrisome is the OECD’s projection that the U.S. budget deficit is unlikely to be brought under control over the next two years, while its soaring current-account deficit is forecast to rise sharply. Neither development would be good news for the long-term health of the U.S. economy.

Altogether, the economies of OECD nations are expected to grow by 2.9 percent next year. Not only is that 0.7 percentage points below the likely growth rate of 3.6 percent for 2004, but it is also a half-percentage point less than the 2005 growth rate (3.4 percent) estimated only six months earlier.

The latest OECD forecast blamed the slower growth rates on the soaring price of oil since its previous economic outlook was issued in May, when the price of oil hovered around $32 a barrel. Tuesday’s forecast, which also projects a minor OECD growth acceleration to 3.1 percent in 2006, assumes that the price of oil will remain close to $44 per barrel through 2006.

The U.S. growth rate is expected to drop from 4.4 percent this year to 3.3 percent in 2005 before modestly recovering to 3.6 percent in 2006. The euro area is expected to plod along next year, while Japan’s growth rate is projected to be sliced in half from 4 percent this year to 2.1 percent next year.

The OECD forecast shows no confidence in the ability of the United States to come to terms with its burgeoning budget and trade deficits over the next two years. The cyclically adjusted budget deficit, expressed as a percentage of total economic output, is projected to remain virtually unchanged from the 4.2 percent in 2004. Meanwhile, the OECD outlook forecasts that the trade-deficit-driven current-account gap will widen from 5.7 percent of U.S. output in 2004 to 6.2 percent in 2005 and 6.4 percent in 2006.

The consequences are straightforward: Once U.S. interest rates rise to their normal levels, hundreds of billions of dollars in net debt-service costs will have to be transferred from the U.S. economy each year to foreign holders of U.S. assets. This would not be a welcome development. The sooner the United States embarks on policies to reverse the unsustainable budget and trade structural imbalances, the better its long-term economic outlook will be.

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