The U.S. economy is picking up steam in 2011, which is a long-awaited positive sign for the Canadian economy, according to a report released by the the Conference Board of Canada.

However, the think tank says the risks to the U.S. rebound beyond 2011 are unusually high, and growth in the succeeding years could be jeopardized by massive fiscal deficits.

The Conference Board report projects real gross domestic product (GDP) growth of a solid 3.2% this year. In the private sector, the recovery is led by export growth of more than 7%, double-digit gains in business investment due to a rebound in corporate profits and better-than-expected growth in consumer spending. Exports are benefitting from a weak greenback and healthy growth in the world economy, particularly in emerging markets.

The stronger GDP outlook can also be attributed to the agreement by the U.S. Congress and the Obama Administration to extend Bush-era tax cuts to all income groups for two more years. Lowering the payroll tax will benefit U.S. labour markets over the short term, and increased discretionary income should boost domestic demand modestly, the Conference Board says.

However, foregoing this revenue — an estimated US$1 trillion in 2011 and 2012 combined — will keep the annual deficit at US$1.3 trillion or more over the next two years. Failure to address these fiscal deficits poses a serious risk for the U.S. economy in the medium term, the Conference Board says.

“A financial crisis similar to the one that affected Greece and Ireland cannot be ruled out if the U.S. government doesn’t eventually implement sound deficit reduction policies,” says Kip Beckman, principal research associate.

The European debt crisis itself is a serious risk to the recovery in the United States, the Conference Board notes. If the crisis extends to countries such as Spain and Portugal, the effect on global equity markets could cause American households and businesses to cut or slow spending growth.

The relatively optimistic outlook for household spending depends on a healthy rebound in private sector job creation — something that has failed to materialize due to tight credit conditions.

“The hope is that as 2011 unfolds, bank lending to the private sector will pick up, enabling firms to hire more workers,” said Beckman.

IE