Economists at Washington's independent Institute for International Economics (IIE) say the U.S. economy will grow at a much slower pace than predicted by the Bush administration.
Michael Mussa, the former chief economist of the International Monetary Fund, says U.S. growth will slow to two and a quarter percent in 2007. That's about one half percent lower than what the Bush administration and the Federal Reserve Board are forecasting. Mussa says the tripling of oil prices over the past three years has created overall inflationary pressure that the central bank has not fully countered with higher interest rates. He thinks there will be one more quarter point rise in short-term U.S. rates this year.
Mussa, now a senior fellow at IIE, says the world economy also will slow next year to four percent growth, down from the five percent expected for this year.
"More generally, the reason to expect the slowdown is that the world economy has been growing more rapidly than its potential for the past three years or so," he said. "And that the pressures that that implies on the inflation side are producing monetary policy reactions."
Another economist at IIE, China specialist Nicholas Lardy, says China's economy continues to grow even faster than what the authorities in Beijing want. He believes the current growth of over 10 percent this year is likely to continue into 2007. Lardy believes that while the Chinese currency is substantially undervalued the authorities are refusing to allow any significant revaluation. The weak currency, he says, is causing distortions to the Chinese economy, not least of which is a huge trade surplus, which boosts the money supply and creates pressure on the weak banking system.
"China is headed for being the world's biggest current account surplus country this year with a current account surplus somewhere in the neighborhood of $240 billion, which will be something more, I think, than nine percent of gross domestic product," Lardy said.
U.S. and international officials want the Chinese to control their rising trade and current account surpluses by revaluing the currency. U.S. Treasury Secretary Henry Paulson will be visiting China after next week's meeting of the International Monetary Fund in Singapore.