Bloomberg economist believes a mild recession coming in 2013
Bloomberg economist Joe Brusuelas writes that the fiscal cliff poses a “significant risk” to U.S. outlook.
Brusuelas writes, “The current Bloomberg consensus forecast is for a growth rate of 2 percent in 2013, with 1.9 and 2.3 percent rates of expansion in the first two quarters of next year. Should Congress delay acting until early 2013 to address [fiscal cliff] issues, growth will likely slow to less than 1 percent during the first half of the year. Persistence of financial gridlock would probably push the economy into recession in the first half of 2013.”
Top findings from the Fiscal Cliff Bloomberg Brief include:
· ECONOMIC IMPACT: The economic impact of permitting the combined tax and spending measures to expire is stark…The result will be higher unemployment, falling taxable income and a mild recession in early 2013
· FISCAL PATH: Government spending will need to be brought into alignment with revenues over the next several years to bring the primary budget into balance and to stabilize the long-term debt of the U.S…Currently, the federal government is running a primary deficit of roughly 6 percent of GDP. Nominal growth over the past year is roughly 3.9 percent and long-term borrowing costs are about 1.5 percent. Assuming these levels, the federal government would be able to run a primary budget deficit around 3 percent and stabilize the debt-to-GDP ratio at near 100 percent. This implies that in coming years, the government would have to pare back annual spending by about $500 billion to accomplish these goals. …An increase in interest rates would require even more restraint in non-discretionary, defense and entitlement spending.
· POLICY BRINKMANSHIP: Given political polarization, these issues may well not be addressed until the start of the 113th Congress on January 3, 2013.
· FISCAL CLIFF AND THE FED: It is probably that the Fed will use its Dec 12 meeting of the FOMC to announce, at a minimum, that it will lengthen its maturity extension program to help mitigate the effects of a shock to the economy should lawmakers fail to resolve the fiscal cliff. Should the outcome of the upcoming election be further polarization in Washington…the Fed may entertain the idea of another round of unsterilized long-term Treasury purchases to complement its open-ended mortgage-backed security acquisitions. A failure by policy makers to address the fiscal cliff of 2012 may provide an opportunity for fixed income investors to profit well in advance of the beginning of next year.
via Bloomberg BRIEF Economics
Follow Joe on Twitter at @joebrusuelas
