The intensity and duration of the pending conflict with Iraq will determine the extent of the downside of American economy and will dictate the strength of the subsequent recovery, according to the Forecast of the Nation, issued February 2003, by the Economic Forecasting Center at the Robinson College of Business, Georgia University.
"Assuming a quick victory in Iraq and no long-term damage to the oil production facilities in the Middle East, the economy's growth engine should begin to roar early in the fourth quarter," said Rajeev Dhawan, the center’s director.
"The rebound is slightly delayed because capital budgeting decisions are made far in advance of what shows up in the NIPA data as investment spending," continued Dhawan. "These decisions are primarily a function of cash flow and interest rate conditions."
According to the report, the current hike in oil prices will continue through the conflict and will take time to moderate, also causing the delayed rebound. However, as in previous recessions, the rise in oil prices will not lead to 'cost-push inflation' and hence the Federal Reserve System will 'hold pat.'
"Inflation is currently at a benign two percent level, which the Fed deems 'acceptable', and the economy is still below its potential. The last thing Greenspan will do is fight cost-push inflation with a rate hike," said Dhawan.
The US’ real Gross Domestic Product (GDP) is expected to increase by 1.1 percent in the first quarter and only 1.3 percent in the second quarter of 2003, as both private investment and consumption remains depressed due to war worries.
The reported forecasts an acceleration of growth in the second half of 2003, especially in the fourth quarter, when real GDP will expectedly grow by 4.5 percent. For the year 2004, real GDP growth is foreseen at 3.6 percent, more than double the growth of 2003. Growth will moderate to three percent in 2005.
Fixed investment is the US will fall 0.3 percent in the first quarter, grow slightly by 1.6 percent in the second quarter and increase at an anemic rate of 2.5 percent in the third quarter of 2003, according to Dhawan. Investment will pick up speed in the fourth quarter when it grows by 7.1 percent.
Expect 2.8 percent and 2.4 percent increases in US inflation in the first and second quarters of 2003. Inflation for the year 2003 will be 2.3 percent, stay at that level in 2004 but rise modestly to 2.7 percent in 2005.
With the upcoming war and slowdown in the economy, unemployment will be in the 5.7 percent to 6.2 percent range. It will expectedly start to moderate in 2004 when recovery finally arrives, the center’s analysts forecasted. US unemployment rate is expected to rise slightly from its 5.9 percent annual average in 2002 to six percent in 2003. It will come down to a 5.7 percent average for 2004, and then to 5.5 percent in 2005. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
