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U.S. economy to grow by 4.2 percent in 2004-OECD

November 26, 2003
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PARIS, Nov 26 (Reuters) - Growth in the U.S. economy is set to moderate in the coming quarters, but should continue at a rate of close to four percent as consumption and investment support the economy, the OECD said on Wednesday.

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

"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," the OECD said in its twice-yearly Economic Outlook.

With the stimulus from recent income tax cuts fading, consumption expenditure was expected to grow more modestly over 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 expenditure had boosted demand but also led to a deterioration in government finances, inflating the federal deficit, it said.

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

On the upside however, strong productivity performance could spark optimism about business profits and personal incomes, fuelling 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 labour 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 soon need to expand payrolls 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 needed to adjust current policies towards balancing a swelling budget deficit to cope with impending demographic pressures.

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