âWe expect the US economy to perform a bit better in 2012, but this will depend on policy decisions coming out of Europe and Washington,â says Mark Zandi, Chief Economist for Moodyâs Analytics.
âThe Europeans are fighting to keep the euro area together, while US policymakers are struggling to find an appropriate degree of fiscal austerity. While we believe these issues will be resolved in a reasonable way, there is a significant degree of uncertainty associated with this assumption,â Zandi adds.
According to the report, how the US economy performs will depend on what Congress and the administration do about the reduced payroll tax rate and unemployment insurance benefits. Unless policymakers act, federal fiscal policy will shave 1.7 percentage points from 2012 real GDP growth as a number of tax and spending measures expire.
The US also faces the prospects of significant repercussions from the European debt crisis. Despite unnerving price swings, US stock prices have not really moved forward since Europeâs problems emerged. And extreme pressure on financial systems as a result of the crisis also threatens the availability of credit on both sides of the Atlantic.
âBesides real GDP growth of 2.6%, we also expect stubbornly high unemployment, which will lead to low inflation and interest rates,â says Zandi.
Moodyâs Analytics expects core consumer price inflation to stay well below the Federal Reserveâs implicit 2% target. Long-term interest rates will move higher by the end of 2012, but if they rise too quickly, the Fed could launch another round of quantitative easing.