US economy begins ‘expansion phase’

THE US economy may grow 4% this year and has begun an “expansion phase,” said John Taylor, the treasury’s undersecretary for international affairs.

“The economy has nearly completed its recovery from the 2000-2001 stock market crash, corporate scandals and the 9/11 terrorist attacks and it is moving into an expansion phase,” Mr

Taylor told the India Economic Summit, organised by the World Economic Forum, in New Delhi.

The world’s largest economy grew at a 3.9% annual pace in the third quarter, faster than initially estimated.

The biggest increase in consumer spending in almost three years hampered efforts by companies to build inventories, suggesting the economy is overcoming higher energy costs and may grow as fast in the fourth quarter.

The increase boosted speculation that Federal Reserve policy makers will raise the overnight bank lending rate on December 14 by a quarter point to 2.25%.

It would mark the fifth rise this year, aimed at forestalling an acceleration of inflation.

With the global economy headed for its longest expansion in history, central banks around the world should act if needed to prevent higher oil prices from fuelling inflation, he said. Oil has fallen by a quarter from a record of $55.67 on October 25. It’s 37% higher than a year earlier.

“They cannot be complacent if inflationary expectations rise with the higher oil prices,” Mr Taylor said.

To help narrow the shortfall in the US current account, other countries need to do more to spur economic growth and make exchange rates more flexible, Mr Taylor said.

The dollar reached a record low against the euro and a five-year low against the yen last week on concern investors may be reluctant to finance the deficit, which reached the equivalent of 5.7% of the US economy in the second quarter, and that the US is willing to let the currency slide to narrow the gap.

“US policies to reduce the budget deficit and promote private savings through personal savings accounts will raise saving and thereby reduce the current account deficit,” he said.

“These policies should be matched by policies to raise economic growth in other countries and increase exchange rate flexibility in countries that do not have such flexibility which will also help to render a smooth adjustment in global payments.”

The US and other countries are pressing China to change the yuan’s decade-old peg of about 8.3 to the dollar. The US says the fixed rate depresses the yuan’s value, giving Chinese manufacturers an unfair advantage over American rivals by making their goods cheaper abroad.

World economic growth is projected to expand 5% this year, the fastest pace in three decades, and then slow to 4.3% in 2005, the International Monetary Fund said.