The daily political machinations over what to do about the impending so-called fiscal cliff without actually coming to resolution is damaging the U.S. economy, according to the chief economist at a large financial institution.
“Without fiscal drag, the U.S. economy would be headed for a growth trajectory in the 3-4 percent range in 2013,” says Craig Alexander, chief economist at TD Economics, an affiliate of TD Bank. “The worst of the consumer deleveraging cycle and its dampening effect on economic growth appear to be over. But just as the private sector is set to provide a welcomed tailwind to the economy, it will be met with worsening cross winds from public sector restraint.”
Alexander acknowledges that the result is likely to be a pace of economic growth that is little changed from the past year.
TD Economics forecasts economic growth to average 1.9 percent in 2013 – down from an estimated 2.2 percent in 2012. However, by the second half of next year, clearer fiscal policy should lead to resurgence in private demand, placing the economy on a stronger footing with 3 percent growth in 2014.
Still waiting for a path around the fiscal cliff
With a few weeks to go before deep spending cuts and tax hikes arrive and hamper economic growth, a deal to avoid them between the White House and Congress has yet to be reached.
“The fact that businesses are pulling back on investing, despite healthy balance sheets and record low interest rates, is a sign that fiscal cliff concerns have already taken a toll on economic growth,” notes Alexander.
TD Economics estimates that if all tax hikes and spending cuts are allowed to take place as scheduled, it would cut 3.0 percentage points from real GDP in 2013.
“Our forecast assumes a deal will be made that avoids plunging the U.S. economy back into a recession in the first half of 2013,” says Alexander. “However, spending restraint and tax increases will still cut economic growth by 1.3 percentage points in 2013,”
Alexander warns that until there is more clarity on the political front, the fiscal situation represents the largest source of economic uncertainty.