25-Sep (Bloomberg) — The so-called ‘fiscal cliff,’ the confluence of $607 billion in expiring tax and expenditure policies set to take effect at the end of 2012, poses a significantrisk to the U.S. economic outlook. Unlesslawmakers reach a compromise to extend some or all of the temporary tax cuts and postpone mandatory spending cuts, the hit to the economy would translate into about 4 percent of gross domestic product.
The current Bloomberg consensus forecast is for a growth rate of 2 percent in 2013, with 1.9 and 2.3 percent rates of expansion in the first two quarters of next year. Should Congress delay acting until early 2013 to address these issues, growth will likely slow to less than 1 percent during the first half of next year. Persistance of financial gridlock would probably push the economy into recession in the first half of 2013.
…The economic impact of permitting the combined tax and spending measures to expire is stark. First, firms are already paring back investment and hiring, and households have stepped up their rate of savings, most likely to smooth out consumption to account for reduced after-tax income next year, and thereby contributing to the current slow pace of growth.
Second, real GDP will likely show negative growth rates of minus 2.2 percent in the first quarter and minus 1.3 percent in the second quarter, with a modest recovery in the second half of the year. The result will be higher unemployment, falling taxable income and a mild recession in early 2013.
PG View: A comprehensive examination of the impending “fiscal cliff’ and the possible fall-out.