Tags: boa | harris | fiscal cliff

BoA’s Harris: Fiscal Cliff Is Closer Than Many Think

By    |   Thursday, 21 June 2012 09:01 AM

The so-called "fiscal cliff" looming at the start of 2013 with planned tax increases and spending cuts may begin to push the U.S. into a recession as early as the second half of this year, Bank of America’s top U.S. economist Ethan Harris tells Fortune.

Last month the Congressional Budget Office warned the fiscal cliff could cause GDP to shrink by 1.3 percent in the first half of 2013, even as many economists are betting the politicians in Washington will cut a deal to avert the worst effects of the measures.

Harris says the fiscal cliff will begin to make itself felt long before it actually takes effect. Corporate earnings will slow in the second half and job growth may drop to nothing by October, pushing the United States towards the brink of another recession.

The economy is already weakening. GDP growth slowed to 1.9 percent in the first quarter from 3.1 percent in the last three months of 2011, according to recent government data.

"If you are running a business, why would you commit to hiring a person or spending money if you know that there's a pretty good chance the fiscal cliff could cause a recession," says Harris. "In terms of uncertainty and confidence, this is last summer times four," he said, referring to the combination of eurozone debt crisis and U.S. debt-ceiling debate last summer that threatened to stall the recovery.

Even if Washington reaches a deal to avert or soften the effects of the fiscal cliff, it is likely to come after the November presidential election, says Harris. A prolonged political fight will weaken Americans’ confidence and faith in government, weighing on the recovery, he says. He sees a recession as a "strong possibility," even as it’s likely the Federal Reserve would step in with a new stimulus program to salvage the recovery. Still, he says the economy will remain anemic. He forecasts growth of 1.4 percent in 2013.

Harris’ forecasts have been more accurate than his peers at major banks. He started the year with the lowest estimate for GDP growth in the second half of any economist at a major Wall Street firm as he predicted recession in Europe would weigh on the U.S. economy.

The consensus among Wall Street forecasters, at an average 2.3 percent growth for this year, is now closer to Harris’s 1.9 percent prediction.

Other surveys released Thursday painted a gloomy outlook for the world economy. They showed the eurozone’s private sector shrank in June by the most in two years, while China's factory sector contracted for an eighth straight month, Reuters reported.

Markit's Flash Composite Purchasing Managers' Index, which measures the services and manufacturing sectors, fell to 46, marking the fifth consecutive month it has held below the break-even point of 50 that marks growth for the eurozone.

Earlier data from Germany, Europe's largest economy, showed its manufacturing sector shrank at the fastest pace since June 2009.

"If we cannot sort out the financial crisis, the eurozone is likely to remain in recession," said Dominique Barbet at BNP Paribas, according to Reuters.

In China, the HSBC Flash Purchasing Managers Index, the first monthly indicator of China's industrial activity, fell to a seven-month low of 48.1 in June, Reuters said.

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Thursday, 21 June 2012 09:01 AM
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