Tax hikes and spending cuts will hobble but not kill economic growth in 2013, according to a new report by TD Economics.
The forecasting unit projects the economy will grow at a sluggish 1.9% growth rate, below the 2.2% average pace of growth in the first three years of economic recovery since the Great Recession. The good news is that economic activity is expected to accelerate as the year goes on, with 2014 projected to grow at a more robust 2.8%.
Job growth is strengthening, housing is rebounding and equity markets have reached new highs, says TD Chief Economist Craig Alexander. If it werent for tax hikes and spending cuts, the economy would be well on its way to 3% to 4% growth.
The automatic spending cuts or sequestration that kicked in on March 1 will cut 0.6 percentage points from economic growth in 2013, according to TD Economics. Other fiscal risks included the fast-approaching March 27 deadline to avoid a shutdown of non-essential government services and negotiations over the statutory debt ceiling, which the government will hit in May.
The recovery of the housing market is a bright spot for the economy, with residential investment likely to directly add 0.4 percentage points to growth in 2013 and 0.5 percentage points in 2014, according to TD Economics.
It also noted that continued monetary support from the Federal Reserve will keep a lid on interest rates and support the recovery of the housing market. With the public sector turning towards deficit reduction, prospects for faster economic growth depend on re-leveraging in the private sector, Alexander said. Fortunately, with the recovery in housing gaining speed, this rotation is taking place and is set to accelerate in the years ahead.