Academic journal article National Institute Economic Review

Prospects for Individual Economies

Academic journal article National Institute Economic Review

Prospects for Individual Economies

Article excerpt

United States

The US economy defied market expectations, and expanded at an annualised rate of 2.5 per cent in the third quarter of 2011, (6) a significant improvement over annualised growth of 0.4 per cent and 1.3 per cent in the first and second quarters, respectively. The acceleration was driven by strong consumer spending and especially business investment. Despite this relatively favourable outcome, since July we have revised down our forecast for growth in the US by 0.7 percentage points this year, and 1.3 percentage points in 2012. The probability of a 'double-dip' recession has increased, but does not yet form part of our baseline forecast.

The downward revision to our forecast for 2011 can be predominantly attributed to statistical revisions released on 29 July 2011, which indicated that the economy was in a far weaker state than previous vintages of data had suggested. Historical GDP figures were revised back as far as 2003, with substantial revisions to the figures from 2008 onwards. There was a significant downward revision to GDP growth in the first quarter of 2011, and our estimates suggest that the revisions to GDP figures for both 2010 and 2011 account for 0.6 percentage points of our forecast revision for 2011.

The revised outlook for next year is driven by the deteriorating financial market conditions discussed in the World Overview section. Corporate borrowing spreads have risen, albeit to a lesser degree than in Europe, and equity prices have dropped by 14 per cent since July. Allowing for an offset from the lower oil price, our estimates suggest that these recent developments reduce the prospects for growth in the US next year by 1 percentage point, and can account for the bulk of our downward revision. Much of the deterioration in the outlook comes through investment, and we expect private sector investment to decline in the first half of 2012.

Concerns regarding a 'jobless recovery' were raised following the recessions of 1990-91 and 2001. But labour market recovery since 2009 has been far weaker than in previous episodes, with rising long-term employment and a steady exit of discouraged workers from the labour market. The unemployment rate is not expected to fall below 9 per cent before 2013, and will remain well above the pre recession norm of 4-5 per cent throughout our forecast horizon.

In September 2011, President Obama proposed the American Job Act of 2011, a targeted fiscal expansion worth approximately $288 billion in the fiscal year 2012. The proposal has not yet been passed by Congress, and it is likely that the final bill, when passed, may be worth considerably less than the initial proposal. The key components of the bill include: extension of expiring payroll tax reductions and unemployment compensation provisions, and targeted spending to curtail job losses in the public and private sectors. According to the Congressional Budget Office, the measures would raise spending by $50 billion in the fiscal year 2012, and cut tax revenue by $238 billion. The bill contains tax increases from 2013, designed to offset the gross costs of the programme. We consider the tax and spending elements of the proposal separately, as the two sides of the plan are being discussed separately within Congress. Figure 14 illustrates the estimated impact of the budget proposals on GDP growth, based on simulations using the Institute model, NiGEM. Our estimates suggest that the spending measures would be expected to raise growth by 0.1 percentage points next year, while tax cuts would add 0.2 to growth in 2012 and 2013.

[FIGURE 14 OMITTED]

Canada

Canada's output declined in the second quarter of 2011 by 0.1 per cent. The contraction was mainly driven by a 2.1 per cent decline in exports, coinciding with stagnating import volumes in the US. The US is Canada's largest customer and accounts for 3/4 of Canadian exports. Figure 15 highlights Canada's dependence on US economic performance. …

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