Free «Macro Economic Research and Portfolio Strategy: Recent (2010-2012) U.S. Fiscal and Monetary Policy» Essay Sample

The 2013 Economic Outlook

The economic outlook of the world economy in 2013 shows that the economy is set to grow at about 2.6%, which is slightly higher than the 2012 growth rate. This growth is pegged on a number of factors including 1) that the uncertainty surrounding the US fiscal cliff, instability in Africa and the Middle East, China’s growth, and the Eurozone debt crisis will all become less intense; and 2) the Quantitative Easing I plans put in place will have a positive impact in growth. This growth should continue from 2013 to 2014, as businesses, consumers, and the government adjust to new fiscal constraint. Leaders will feel the pressure to rein budget deficits. According to SIFMA predictions, the economy is to grow at a rate of 2.1% in 2013, however giving a warning on a number of factors that could affect the forecast. The economy of the US is expected to rebound from its previous underlying momentum. However, The Economic Outlook, according to a Wells Fargo report, indicates that the economic growth will be around 1.3, down from 2.2 in 2012. The report further suggests that the growth will be worse if the factors reported above take a toll on the economy almost simultaneously.

Of concern is the Eurozone which has experienced a lot of stress since 2011. However, recent policy actions by the ECB and EU governments have seen a reduction of the financial risks that are related to the Eurozone debt crisis. Though, the European countries in the south will remain in recession in 2013 dragging the northern economies like Germany (which will see positive but weak growth) with them. These financial troubles from Europe will continue to weigh on the global economy but it is expected that conditions will improve towards mid and end year. Basically, it has an implication that if the Eurozone economy continues to contract, then the growth of the US in 2013 and years ahead will not be very strong according to the CBO projections. Countries like Greece, the ratio of debt-to-GDP has risen and was 100% by 2007 and now stands at more than 170%. Most of the other European countries have also experienced an increase in sovereign debt. It can be clearly seen from the Eurozone Bond yield from the graph below. 

Analysts at Goldman Sachs, Aleksandar Timcenko, and Noah Weisberger, gave their “data on the borderline” presentation of a negative global economy with suggestion of brighter spots. The prediction from July 2012 shows that the growth is negative but improving. It shows that lower growth is priced in the US and in China. Though, according to podcasts by Bloomberg, several analysts seem optimistic that the global economy and indeed the US economy will bounce in 2013. The managing director of Stone & McCarthy Research Associates in Princeton, New Jersey, Mr. Raymond Stone said that the country is moving in the right direction. David Crowe, the chief economist at the National Association of Homebuilders, believes that the US will experience modest growth in the housing sector. All these are signs that 2013 will experience better growth rates than 2012. 

Source: GS Global ECS Research

According to a report by Tom Bemis of Market watch, 100 charts from Goldman Sachs from last year predicting 2013 unveil some facts like the fact that S&P 500 is at its 1996 levels and the US households own slightly above a third of the US equity market, then, mutual funds at 21% and pension funds at 9%.

Politicians, notably the US president Barrack Obama, have proposed raising the tax rate for some Americans. It is from the fact that the first quarter of 2013, the economic growth is expected to remain constrained at around 1.0% mainly because of the uncertainty of the future the tax policy as well as the expected short-term solution to the fiscal cliff. As the uncertainty against the fiscal cliff is resolved, it is expected that the US businesses will spend and hire more. It is an interpretation that growth will hover around 2% toward the end of the year (a recession is likely if the US falls off the fiscal cliff).

A survey indicated that respondents were optimistic that Congress would mitigate the fiscal cliff with a temporal extension of the Bush era cuts. Most if not all aspects of the fiscal cliff (the debt ceiling, appropriations, expiring tax cuts and sequestration) will be postponed in the long-term and a form of budget plan like a gradual phase in fiscal cuts or the framework by Bowles-Simpson adopted.

Quantitative Easing

The Federal Open Market Committee (FOMC) did not change its 0.0% target for federal funds rate range through 2013, although, most of the respondents expect a hike starting in mid2014. Respondents remained optimistic that the Federal Reserve will conduct another quantitative Easing III, QE3 in case of a subpar GDP, weak job growth, possibility of contagion from Europe or rising deflationary risks. The QE3 was expected to be near-term with expectations that QE3 and the Fed will act through purchase of long-term security purchases. However, with declining structural budget deficit, fiscal policy in European countries will continue to exert headwinds on the economic growth. European Central Bank (ECB) has a limited scope to ease policy on “price stability” and turn to such unconventional methods like QE in order to support economic growth. The QE2 was mainly used by Fed to control the long-term interest rates by pushing demand for high maturity Treasury securities to rise. The aim of the QE2 is to spur a long-term economic growth by boosting employment through a controlled inflation and low interest rates. 

US Unemployment Rate

In late 2011, the FOMC committee felt that the economic outlook calls for some additional monetary policy in order to support a stronger economy and keep inflation to reasonable levels by use of the Operation Twist measures. Measures were taken to tighten monetary policy. The Operation Twist started to take effect from June 2012 during which Fed the QE was expected to fight for the dollar explosion suggesting the Operation Twist was used only for a momentary effect on the economy. 

The Eurozone crisis has not helped the situation but flattened the US treasury as investors flew to the American bond market. 

Analysts at Goldman Sachs predict that rates on 10 year Treasury Bonds will start rising again in spite of Fed’s efforts. In particular, many people expect that the exit of Greece from the Euro will lead to lowering the value of the Euro vs. dollar, the GDP of the US and the US’s interest rates.


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