The United States economy is picking up steam in 2011, which is a long-awaited positive sign for the Canadian economy, according to The Conference Board of Canada’s U.S. Outlook-Winter 2011. But the risks to the American rebound beyond 2011 are unusually high and growth in the succeeding years could be jeopardized by massive fiscal deficits.
The report projects real gross domestic product (GDP) growth of a solid 3.2 per cent this year. In the private sector, the recovery is led by export growth of more than eight per cent, double-digit gains in business investment due to a rebound in corporate profits and better-than-expected growth in consumer spending. Exports are benefiting from a weak U.S. dollar and healthy growth in the world economy, particularly in emerging markets, said the Conference Board.
The stronger GDP outlook can also be attributed to the agreement by the U.S. Congress and the Obama administration to extend tax cuts to all income groups for two more years, said the report. Lowering the payroll tax will benefit U.S. labour markets over the short term, and increased discretionary income should boost domestic demand modestly.
However, foregoing this revenue — an estimated $1 trillion in 2011 and 2012 combined — will keep the annual deficit at $1.3 trillion or more over the next two years, said the Conference Board. Failure to address these fiscal deficits poses a serious risk for the U.S. economy in the medium term.
“A financial crisis similar to the one that affected Greece and Ireland cannot be ruled out if the U.S. government doesn’t eventually implement sound deficit reduction policies,” said Kip Beckman, a principal research associate at the Conference Board of Canada.
The European debt crisis itself is a serious risk to the recovery in the United States, said the report. If the crisis extends to countries such as Spain and Portugal, the effect on global equity markets could cause American households and businesses to cut or slow spending growth.
The relatively optimistic outlook for household spending depends on a healthy rebound in private sector job creation — something that has failed to materialize due to tight credit conditions, said the Conference Board.
“The hope is that, as 2011 unfolds, bank lending to the private sector will pick up, enabling firms to hire more workers,” said Beckman.
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