Metrovox Economic Commentary

Metrovox Economic Commentary

Published on June 3, 2005

Center for a New Economy

Uncertainty is the order of the day in the economic sphere as we approach the midpoint of the year. First, the geopolitical situation remains extremely fluid. Insurgents in Iraq have managed to tie up coalition resources that could have been used for the economic reconstruction of the country. Afghanistan is not doing much better. Meanwhile the showdown between the U.S and North Korea regarding nuclear weapons continues and Iran, for its part, has indicated it will continue pursuing its own nuclear program, in the face of European and U.S. opposition. A crisis involving either North Korea or Iran could escalate to dangerous levels fairly rapidly and would have significant negative effects in world markets.

Second, the price of oil hovers above $53 a barrel due to a number of structural factors, such as high demand in China, low refining capacity in the United States, the failure of Iraqi oil fields to come on line and political turmoil in Venezuela, none of which will disappear overnight.

Third, growth in the Euro zone has all but stalled, with the European Commission cutting its second quarter growth forecast to 0.3 percent from an already anemic 0.4 percent. The rejection of the European constitution by French and Dutch voters has increased uncertainty about the process of economic and political integration in Europe. As a consequence the Euro is trading at a seven month low against the dollar.

Finally, the United States economy continues to move along an unsustainable path. The U.S. government closed fiscal year 2004 with a budget deficit of $412 billion and is expected to finish the current fiscal year with a shortfall of around $400 billion. In addition, American consumers have been buying far more from the rest of the world than they have been able to sell. Therefore, the U.S. is facing record (in nominal terms) trade and current account deficits.