Sept. 26 (Bloomberg) -- The U.S. lost its position as the world's most competitive economy to Switzerland as budget and trade deficits prompted a slide to sixth in the World Economic Forum's annual rankings.

Switzerland jumped from fourth place last year and Finland, Sweden, Denmark and Singapore all overtook the U.S. with Japan, Germany, the Netherlands and the U.K. rounding out the top 10 in the study of 125 nations by the Geneva-based forum.

The decline in U.S. competitiveness provides another challenge for the world's largest economy as economists at JPMorgan Chase & Co. suggest its potential for growing without inflation is fading and as the expansion shows signs of slowing.

``The U.S. has now been running twin deficits for many years and there is an increasing concern that they are creating a vulnerability in the economy,'' Augusto Lopez-Claros, the forum's chief economist, said in an interview.

Switzerland, home to companies such as Nestle SA and Novartis AG, topped the table because of its reputation for innovation, research and development and its scientific infrastructure, the forum said.

Europe's eighth-largest economy may grow close to 3 percent in 2006, the most in six years, the central bank forecasts. Exports rose an inflation-adjusted 8.6 percent in the first eight months, boosted by demand from the 25-nation European Union, which buys 60 percent.

While the U.S. remained the best country to do business in, it ranked 69th for its economic environment with the government set to post a fifth consecutive annual budget deficit and after its current account deficit widened more than forecast last quarter to the second-largest on record.

Public Confidence

The country's overall competitiveness was also undermined by increasing doubts about the effectiveness and trustworthiness of its political leaders with the government's delayed reaction to Hurricane Katrina likely damaging the public's confidence, the forum said. Weaknesses were also detected in primary education and health care, with infant mortality and HIV/AIDS more prevalent than in other rich economies.

JPMorgan economists led by Bruce Kasman last week published a study that concluded the economy's potential growth rate has slowed to 2.7 percent from 3.5 percent at the start of the decade. The productivity of U.S. workers faded last quarter, increasing at an annual rate of 1.6 percent after a 4.3 percent gain the prior three months.

Home Prices

The deterioration comes as the economy starts to slow following a housing slump. Prices of existing homes in the U.S. fell last month for the first time in 11 years as sales declined to the lowest since early 2004, the National Association of Realtors said two days ago.

``Raising productivity is the driving force behind the rates of return on investment which, in turn, determine the aggregate growth rates of an economy,'' Lopez-Claros said in the report. ``A more competitive economy will be one which will likely grow faster in the medium and long term.''

Falling prices will make it harder for consumers to tap the equity in their homes, a major source of cash in recent years. That may pose a risk to their spending, which makes up 70 percent of the economy.

The World Economic Forum, funded by more than 1,000 corporations and best known for its annual conference in the Swiss ski-resort of Davos, has published competitiveness reports since 1979. The rankings include grades for about 90 variables ranging from innovation to education as well as the results of a poll of 11,000 corporate executives.

Italy Slips

Among the Group of Seven industrial nations, Germany won points for its judicial system, with the U.K. excelling in the efficiency of its markets. Canada and France ranked 16th and 18th respectively, lower than last year, while Italy slipped four notches to 42nd because of its poor fiscal position.

Within the EU, Poland was the worst performer at 48th. Asian economies led by Singapore were praised for their infrastructure, well-educated workforce and efficient markets. Japan was urged to improve its public finances and markets.

India climbed two places to 42nd because of the quality of its scientific research, while China fell to 54th from 48th because school enrollment remains low by international standards.

In Latin America, Chile had the highest position at 27th thanks to making policy-making more transparent. Brazil declined to 66th from 57th amid economic problems, including its budget deficit.

Middle East economies including Israel, Kuwait and Qatar all rose, while South Africa remained the best performer in its region by rising to 45th. Angola was ranked the least competitive economy of all those surveyed, with Burundi and Chad just above it.

To contact the reporter on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net.

Last Updated: September 26, 2006 07:53 EDT