Economic Review - Second Quarter 2005 (continued) -Analysis.
Mondaq Business Briefing › Nbr. 2005, January 2005
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Economic Review - Second Quarter 2005 (continued) -Analysis.
Analysis: The world economy
US growth to slow sharply by 2006 The US economy performed strongly last year, with GDP growth of 4.4%. We expect growth to slow to 3.3% this year as rising interest rates tighten the cyclical screw. Growth is then expected to slow further to 2.5% in 2006 as the economy's structural problems centring on the current account deficit, Federal budget deficit, and the over-valued housing market begin to bite. For now at least, business activity remains relatively firm. The resurgence in business spending was one of the most eye-catching developments of last year. But given the even bigger rebound in corporate profits, investment growth was actually relatively disappointing. With profits stalling as productivity growth moderates, we expect business investment growth to slow this year. However, low borrowing costs should prevent business spending from collapsing. Retail sales growth remained buoyant last year too, despite record high gasoline prices and lacklustre employment growth in the second half. But modest income growth meant that households had to run their savings rates down to wafer-thin levels. Households have been using gains in real estate wealth to fund spending. A housing slowdown this year should therefore contribute to slower spending growth. House prices rose by 10.8% last year, the fastest pace since the early 1970s. The upshot is that house prices are now more over-valued than ever before. The average house costs over 3.5 times the annual disposable income of each emplo...See the full content of this document
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