OTTAWA—The U.S. economy is recovering and the situation could get much worse if the country falls over the looming “fiscal cliff,” according to a new report from the Conference Board of Canada (CBoC).
The CBoC’s U.S. Outlook-Autumn 2012 forecasts real gross domestic product (GDP) to grow by a tepid 2.3 per cent this year and by 2.4 per cent next year.
But this outlook assumes that Congress and the White House will reach an agreement to avoid automatic spending cuts and tax increases scheduled to kick in early in 2013.
“The U.S. economy will take a major step toward, finally breaking free from the clutches of the 2008-09 recession, but only if the United States Congress and Administration manage to make some headway in solving the nation’s daunting fiscal challenges,” CBoC principal economist Kip Beckman said in a statement.
“Concerns about how Congress will deal with the rapidly approaching fiscal cliff are having a strong negative effect on both consumer and business confidence.”
The “fiscal cliff” refers to the combination of tax increases and spending cuts totaling more than $700-billion—five per cent of the U.S. economy—that are set to take effect automatically in January if other deliberate fiscal policy action is not taken.
According to the CBoC, the move would snuff out growth in both the U.S. and Canada.
Congress and the White House have several options as the deadline approaches, the report says, but the default option is to do nothing and allow the tax increases and spending cuts to take effect next year.
While the federal balance sheet would improve immediately, it would come at a huge price.
The U.S. would fall back into recession in the middle of 2013, the CBoC says, and the economy is too fragile to handle sharp tax increases and cuts in government spending.
The second option would be to extend the current tax and spending policies into 2013.
Maintaining the fiscal status quo would have a positive short-term effect on U.S. growth, but it would also likely lead to a U.S. credit rating downgrade.
Ongoing trillion-dollar annual deficits would hurt the economy over the longer term, the report says.
The report says a final option would be to reach agreement between Congress and the White House that would allow the federal government to gain some control over its long-term finances and enables the economy to continue its modest growth into the medium term.
Not all the news about the U.S. economy is gloomy.
Most firms are in excellent financial shape, banks are well-capitalized and have resumed lending and households have made a huge dent in their debt burdens.