Looking toward 2013, economists see a question mark in the shape of the fiscal-cliff negotiations.
“Normally when sitting down to write a preview of the year ahead, we would start by commentating on what sort of momentum the U.S. economy had going into the new year," economists at the macroeconomic research firm Capital Economics wrote in a recent note on 2013. “What momentum the economy currently has or doesn't have right now, however, is largely irrelevant. The only thing we know for sure is that, one way or the other, the outcome of the fiscal-cliff negotiations will shift that momentum, making them pivotal to the economic outlook for 2013.”
Will next year be a “very good one” for the economy, as Federal Reserve Chairman Ben Bernanke said it has the potential to be? Or will it be a year of continued sluggish growth and unemployment well above 7 percent? Here’s five things National Journal is expecting.
1. A slow start. 2013 is expected to begin with much more of a whimper than a bang. Economists warn the first half of the year will drag, even if a deal to avert the fiscal cliff is reached before Jan. 1. “We’re going to start out on a very weak and kind of dangerous note, as both the U.S. and Europe deal with their fiscal issues,” Harris said on a recent call with reporters. Any fiscal cliff deal is expected to cause some degree of fiscal tightening, which will put a damper on growth in the short term.
2. Followed by a stronger second half. But with a fiscal-cliff deal will also come the removal of uncertainty, and economists say the economy could be poised to grow at a healthy clip as the renewed sense of certainty unleashes pent-up demand. Many economists believe that concerns over the year-end cliff are holding back the economy today. “Even though we've not yet even reached the point of the fiscal cliff potentially kicking in, it's already affecting business investment and hiring decisions by creating uncertainty or creating pessimism,” Bernanke said at a recent press conference. Once the cliff is resolved -- if the cliff is resolved -- those concerns would lift, paving the way for greater consumer and business spending as well as hiring. Housing is also expected to finally be a boon to the recovery in 2013. The sector’s turnaround was one of the biggest success stories of 2012 and all signs point to continued growth ahead. “We think as the crisis, crises in Europe, and the U.S. ease back … we’ll get a better second half,” said Ethan Harris, managing director and head of North America economics at Bank of America Merrill Lynch.
3. Growth might be good, but it probably won’t be great. Why? Blame the global economy. The investment outlook probably hinges more on the global economy than a deal to avoid the fiscal cliff, according to the economists at Capital Economics. Europe is the most obvious area of foreign concern; economists at High Frequency Economics said that even though markets aren't experiencing the same degree of turmoil, the eurozone ended 2012 in much worse shape than 2011, and they predict a decade-long depression across the Atlantic. But there are also fears of a Chinese slowdown. And as always, Middle Eastern geopolitics is another wild card. A flare-up in tension there could cause a disruption in the oil supply and at least temporarily harm the recovery.
4. Easy monetary policy. The Fed expanded its current program of asset purchases intended to spur borrowing and generate economic activity, known as QE3, this month. The central bank also said it expects to maintain its stance of ultra-low interest rates through mid-2015. With inflation forecast to remain in check and only modest predictions for improvement in the labor market and sluggish growth, expect the Fed to keep its foot firmly on the gas pedal in 2013. The bank could find itself the subject of renewed congressional scrutiny as a result; this year, the Fed was in the spotlight over its easy policies, and the House threatened to curb its independence with a bill to audit its monetary policy decisions. If inflation looks anything but contained, expect lawmakers to once again put the Fed in the hot seat.
5. Progress on Dodd-Frank implementation. As of Dec. 3, only 33 percent of the 2010 Dodd-Frank financial-reform rules were finalized, according to law firm Davis Polk & Wardwell, which tracks the law’s implementation. Progress is expected to continue slowly but surely next year. The "Volcker Rule," for example, which would prohibit banks from trading on their own accounts and is one of the most contentious pieces of Dodd-Frank, is expected to be finalized in early 2013. But there’s a new wrinkle: The Securities and Exchange Commission, one of the key financial regulators charged with writing many of the remaining rules, is now evenly divided between Democrats and Republicans in the wake of Chairman Mary Schapiro’s Dec. 14 departure. Those political divisions could make rule-writing an even longer process, and any nominee to fill Schapiro's now-vacant post could face a tough confirmation fight.