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Higher Oil Prices Expected to Slow World Economy

Economists in Washington are projecting a slowdown in global growth caused mainly by higher energy prices and higher interest rates.

Michael Mussa, former chief economist at the International Monetary Fund (IMF), believes global growth will decelerate to 3.5 percent in 2006.  Mr. Mussa, now a senior researcher at the Institute for International Economics, says because of the recent spike in oil prices the economic outlook has deteriorated in just the past three months.

"So, definitely a weaker global economic prospect, not yet at the edge of recession, but if oil prices were to spike up further, it isn't very far to go to tip the global economy toward recession. But as I say I don't think we'll see it," said Mr. Mussa.

World economic growth peaked at five percent in 2004 and probably has fallen to four percent this year.

Another researcher at the Institute for International Economics, Martin Baily, who was President Clinton's chief economist, expects U.S. economic growth to slow to about two percent next year. He expects only a slight negative impact from Hurricane Katrina and is confident that despite higher oil prices, the U.S. economy will avoid recession, in large part because foreign investors are still attracted to the U.S. economy.

"I think the availability of liquidity around the world is going to help the U.S. economy keep moving," said Mr. Baily.  "There is a lot of momentum in the U.S. economy. This is a big ship. It doesn't go immediately from three and a half percent to minus one quickly. So I would not expect to see a recession in 2006."

Fred Bergsten, the director of the economics institute, is deeply worried by the sharp rise in Chinese exports and the corresponding rise in the U.S. trade deficit with China. He believes serious trade friction between the two countries is inevitable. He says China's recent modest currency revaluation is inadequate. Mr. Bergsten says in order for China's huge trade surplus to stabilize and decline there needs to be a much larger currency revaluation. China's fast-growing economy is expected to slow to 7.5 percent growth next year.

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