The increasing fragility of the world economy is underlined by the latest report from International Monetary Fund staff on the position of the United States. The report, which will be the subject of discussion before a final document is prepared, said there was “general agreement” that the outlook for the US in 2005 and 2006 was “favourable” with gross domestic product (GDP) expected to expand at around 3.5 percent over the next two years.
Noting that the US had been the “main locomotive of global growth” in the recent period, the report said the US economy was again expected to outperform the other members of the Group of Seven major industrialised countries. Herein lie some of the major problems for the world economy as a whole because US growth is increasingly being supported by what the IMF report called “unprecedented borrowing” both from foreigners and domestically.
“This unusual constellation of financial flows has sustained growth by keeping long-term interest rates low and stimulating house prices. However, this creates a number of vulnerabilities, including the possibility of a marked slowdown of household spending, particularly were the housing market to cool.”
The report went on to warn that “external imbalances”—the US balance of payments deficit now running at more than 6 percent of GDP and the inflow of funds from the rest of the world needed to finance it—posed a “significant risk” to the global economy. The US deficit is “widely viewed as unsustainable” and with limits to the global demand for US assets emerging at some point “there is a risk that an abrupt and disorderly shift in investor preferences could have an adverse effect on interest rates and global capital markets”.
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http://www.wsws.org/articles/2005/may2005/usec-m30.shtml