MercoPress. South Atlantic News Agency

In spite of record US deficit, expansion remains solid

The United States current account deficit widened 3,6% in the first quarter of this year to an all time record of 195,1 billion US dollars, following 188,4 billion in the last quarter of 2004, reported the US Department of Commerce.

Wall Street was expecting 190 billion, and the figure represents 6,4% of GDP, a level that economists and analysts consider too high which rapidly reflects in money markets and the US dollar standing against other main currencies.

High deficit mean US is increasingly dependent on overseas financing, and if the dollar keeps sliding the Federal Reserve will be forced to continue raising interest rates, making consumer credit dearer. Consumer spending represents two thirds of the US GDP.

"The US dollar has lost a great deal of ground because markets are uncomfortable with a deficit that has now reached record levels threatening with continued problems", said investor banker Alberto Rashid.

However US Secretary of the Treasury John Snow argued that the current economic tendencies show the US economy growing faster than the European Union and Japan.

"Money markets in the US remain strong, have liquidity and continue to attract capital", said Mr. Snow.

If the current situation persists the US is forced to attract 2,1 billion US dollars per day to finance the deficit and keep the US dollar stable.

Goods and services represent 98% of the current account deficit. In the first quarter the trade deficit reached 171,6 billion US dollars compared to 169,2 billion in the last quarter of 2004.

Two factors apparently coincided with the record figure, China's growing trade surplus with the US and unilateral financial outflows for the tsunami recovery, both private and government grants, totalling 27,1 billion in the first quarter of 2005, from 22,4 billion in the last quarter of 2004.

Cleveland Federal Reserve president Sandra Pianalto addressing a manufacturers' forum underlined what she described as the strong fundamentals of the US economy which should keep the expansion going.

"We are still seeing some unusual signs in the current expansion such as weak employment, strong productivity growth and high energy prices", said Ms. Pianalto. "However the underlying fundamentals remain strong, low interest rates, low inflation, robust productivity growth and solid corporate balance sheets", she added forecasting the current expansion will extend for the whole of 2005 and "further on".