Canadians like US prospects if policymakers act, but not overreact

FOR American growth to continue, US policymakers must formulate a credible medium-term austerity plan soon in the wake of Standard and Poor's downgrade of US creditworthiness, according to Canada's export bank chief economist Peter Hall.


"This will likely be enough to assuage twitchy market-watchers for the time being," said Mr Hall, who is also vice president of Export Development Canada.


But he also warned "overreaction could be as fatal as no action. Immediate US austerity could guarantee crisis. Isolated austerity has been proven to work; coordinated multi-country austerity in the absence of strong private-sector fundamentals could undermine austerity's core intent at precisely the wrong moment.


"Growth is returning, and growth is a huge help to fiscal woes. The IMF estimates that a revived US economy would improve the deficit for 2011 by US$360 billion (2.8 per cent of GDP). Admittedly, this still leaves a sizeable structural deficit, but more solid underlying growth would make this easier to attack," Mr Hall said.


"Consider the UK, the new government launched the toughest austerity plan in a generation, raising the value-added tax and the retirement age while promising to reduce spending by 20 per cent in most government departments. Rating agencies cheered, but the economy swooned. In the fourth quarter of 2010, consumer confidence tumbled and the UK economy contracted two per cent. Likewise, austerity measures on the continent are suppressing region-wide near-term growth," he said.


"The US chose stimulus, extended personal tax cuts, reduced payroll taxes and accelerated charge-offs of business investment to the tune of $860 billion over two years. Markets didn't appear to mind. In fact, the world seemed relieved to see US growth projections for 2011 rise well into the three per cent zone," Mr Hall said.


"Which approach is right? Absent US austerity, the CBO projects runaway deficits and debts. Analysts are now musing on the likelihood of a peripheral-Europe-style 'Minsky moment' hitting the US, which would throw the world into crisis.


"But US export growth is solid, thanks to a weaker greenback. Consumers are spending more, and this time it's sustainable. Job creation is gaining momentum, and even SMEs are hiring again. And the best is yet to come. Rising activity is helping the housing market to run down its huge excesses, and when this market gets closer to balance - expected in early 2012 - true recovery-style growth will kick in, with positive effects not only for the broader US economy, but for the world as a whole," said Mr Hall.
(Source:http://www.schednet.com)