Reprinted from: http://bloomberg.com
F inancial markets will turn on the U.S. as they have on European governments if the U.S. fiscal situation doesn’t improve, said Martin Barnes, Chief Economist at BCA Research in Montreal.
The risks posed by the U.S. budget deficit are important for the Canadian economy, economists said at the Bloomberg Canada Economic Summit in Toronto today. While rapid moves to reduce the U.S. deficit could slow the Canadian economy, investors could also sell U.S. bonds if the government doesn’t do enough.
“I’m very worried,” Barnes said at the Bloomberg Summit in Toronto today. “It’s only a matter of time. It’s a question of when, not if, the markets do to America what they did to Europe. The markets will turn to the U.S. like a pack of wild dogs once they finish chewing Europe out.”
U.S. House Republicans have proposed a budget that would lead to a $3.1 trillion deficit over the next decade, a little less than half as much as President Barack Obama’s budget plan. The battle between Republicans and Democrats over reducing budget deficits is set to intensify toward year-end, when the administration and Congress must decide whether to extend income-tax cuts, raise the debt ceiling and allow automatic budget cuts to be enacted.
Fiscal tightening in the U.S. will probably be limited as lawmakers vote against scrapping tax cuts, Barnes said.
“They will extend most of the tax cuts,” he said. “They won’t let the defense spending cuts go through. There will be fiscal tightening but it won’t be anything near like the fiscal cliff that some people see.”
U.S. economic growth is poised to outpace that of Canada this year and next, according to economists surveyed by Bloomberg. U.S. gross domestic product will climb 2.3 percent this year and 2.5 percent next year. That compares with 2.1 percent in 2012 and 2.3 percent next year for Canada, a separate survey shows.
Still, when compared with previous recoveries, expansion in the world’s largest economy remains “lousy,” Barnes at BCA Research said.
“It’s a very disappointing recovery,” he said. “We’ve lowered the bar on what is considered an acceptable outcome. I like to remind people that coming out of the 1981-82 recession, the economy grew 7.7 percent on average for six quarters. That was a recovery. At 3 percent growth it will take years to get the unemployment rate down.”