India Perspective: US's Swelling Deficit, OPEC's Possible Production Cuts

Oct.21.08 | About: ING Groep (ING)

The ever expanding US deficit has been a well documented fact. Now it seems that in the present scenario, the US does not mind if this deficit widens further.

And widen it definitely will with the gargantuan bailout package that the country has announced to pull out the financial system from the brink of a collapse. The fact that as the economy slows, tax revenues are expected to dip is only expected to worsen the problem further. Plus, the US' war in Iraq and Afghanistan is only adding to the strain on the government's finances.

While the US acknowledges this, its focus on bailing out the troubled financial system is so great that it considers the widening of the deficit as lesser of the two evils and is therefore ready to compromise on this front in a bid to keep the economy from replicating the Great Depression era.

The deficit in the current fiscal year is expected to balloon to US$ 700 bn, up by more than 50% from the previous year. One assumption that the US is banking heavily on is the fact that despite the swelling deficit, people all over the world are still willing to lend to the US as they are confident that the country will not default on its obligations however trying the conditions may be.

But if the Americans think that they can keep the deficit issue permanently on the backburner, they will have to think again as this problem is most likely to resurface once the economy recovers. For the time being, however, curtailing the deficit is certainly not the top most priority.

OPEC contemplates cut in crude output
The OPEC (supplier of more than 40% of the world's oil) rejoiced when crude prices soared to US$ 147 a barrel in July. The organisation is now faced with the prospect of falling prices as the global economies slow down. As per reports on Bloomberg, it plans to cut output for the first time in two years given that oil is expected to hurtle towards the US$ 50 a barrel mark as countries sink into recession and demand further cools down. Oil receding further was amply demonstrated by the fact that options contracts to sell oil at US$ 50 by December soared 50-fold in the past two weeks.

While falling oil prices takes the heat off economies and helps in some measure to arrest the rise in inflation, the OPEC nations are not enthused given that their economic growth engine depends upon crude prices staying high.

In fact, the growth of some nations such as Iran and Venezuela, whose earnings largely come from oil exports, will need oil to remain at US$ 80 a barrel if they want to sustain growth. Further, ING (NYSE:ING) Bank estimates that GDP of the six countries which are a part of the Gulf Cooperation Council [GCC] will slump 25% if oil hovers around US$ 50 a barrel. However, while the intention to cut prices has been stated, the extent of the same has yet to be determined.