US economy to grow 3.5% this year

Fed chief sees modest impact from euro zone crisis, faster growth led by consumer spending

WASHINGTON: The US economy is on track to grow 3.5 per cent this year as it sees only a 'modest' impact from the euro zone debt crisis, Federal Reserve chairman Ben Bernanke said yesterday.

'The economy... appears to be on track to continue to expand through this year and next,' Mr Bernanke said in testimony to Congress.

He said the pace of growth would likely quicken next year, driven by rising consumer spending.

'The incoming data suggest that gains in private final demand will sustain the recovery in economic activity,' he told a House of Representatives panel.

'Consumer spending is likely to increase at a moderate pace going forward, supported by a gradual pick-up in employment and income, greater consumer confidence, and some improvement in credit conditions.'

US consumers, long the drivers of the world's largest economy, are spending around 3.5 per cent more today than they were this time last year, Mr Bernanke said.

He warned that the still-moribund housing market continues to drag on the recovery, as home prices are pushed down by vast numbers of vacant houses and home builders struggle to get credit.

'Underlying housing activity appears to have firmed only a little since mid-2009,' he said.

But continuing his recent upbeat tone, Mr Bernanke said the spiralling European debt crisis should have only a modest impact on the US.

'If markets continue to stabilise, then the effects of the crisis on economic growth in the United States seem likely to be modest.'

He said the negative impact of Europe's crisis was offset by a decline in the US government's cost of borrowing, as investors rush to the perceived safe haven of Treasury bonds.

Mr Bernanke added that Europe's crimped economy could push down oil prices, a trend that could help US consumers and businesses. But he warned that the US must heed the lessons of fiscal woes seen across the Atlantic.

The US national debt stands at a historic high of US$13 trillion (S$18.4 trillion) and government deficits are soaring.

Mr Bernanke said that while short-term spending had been needed to stimulate the economy, the deficit must be brought down over time.

Meanwhile, a top International Monetary Fund official has said Europe's debt crisis could disrupt global trade, hurting demand for Asian exports and sending 'hot money' into the region if policymakers fail to act swiftly and appropriately.

Although Asia has limited financial links to euro zone economies, its stronger growth prospects could attract more capital flows to the region and lead to asset bubbles, said IMF deputy managing director Naoyuki Shinohara yesterday.

'The key will be for policymakers to keep an eye on the bigger picture and be ready to act swiftly as developments unfold,' Mr Shinohara said in a lecture to financial professionals in Singapore.

'With Asia's economic muscle growing, the policy choices made in this region will have an important impact on the global economy,' he said.

Mr Shinohara, however, also said the economic situation in Hungary, the latest European country to run into financial difficulties, was not as serious as portrayed in some media reports.

And the World Bank yesterday said global growth this year will accelerate faster than previously estimated, even as some countries risk a double-dip recession.

'Market nervousness concerning the fiscal positions of several European high-income countries poses a new challenge for the world economy,' it said in its annual Global Economic Prospects report.

'If markets lose confidence in the credibility of efforts to put policy on a sustainable path, global growth could be significantly impaired and a double-dip recession could not be excluded.'

The bank said the world economy is forecast to expand 3.3 per cent this year. Its prediction in January was for growth of 2.7 per cent.

AGENCE FRANCE-PRESSE, REUTERS, BLOOMBERG

Source: Straits Times, 10 Jun 2010