The U.S. economy has reached a turning point and is likely to improve later this year and into the next, according to Douglas Porter, chief economist, managing director, BMO Capital Markets, although possible road blocks remain.
“We think 2014 is the year that the U.S. economy finally breaks out of the funk that its been in since the early days of the recovery,” said Porter, who spoke at the Toronto Board of Trade on Wednesday.
Porter predicts the U.S. economy will grow 2.2% again this year followed by further growth in 2014. As well, while the Canadian economy is not expected to do as well as its southern neighbour, according to Porter, it is likely to see some positive growth because of the strong ties between it and the U.S.
However, Porter cautioned that while the U.S. economy and markets are poised for a pretty good year there are potential speed bumps ahead. “We have seen this movie before,” he said, “where the financial markets get off to a wonderful, optimistic start at the beginning of the year and then something comes along to sort of frustrate the U.S. economy.”
One such speed bump is the ongoing political drama in Washington. For example, U.S. politicians narrowly avoided an economic slowdown by dodging the fiscal cliff and a possible government shutdown, said Porter, however another possible debt ceiling debate later this summer or early fall poses another threat to U.S. growth in 2013 and 2014.
These political distractions are frustrating for economists, said Porter, because they detract from the fact that the U.S. is actually starting to get its budget deficit under control. This year’s budget deficit is going to be about 4% of GDP, said Porter, down from the 10% seen during the height of the economic crisis. “[Four per cent is] still uncomfortably large,” he said, “but that’s still getting close to being sustainable.”
The second potential obstacle for continued U.S. economic growth is the labour force participation rate. While the U.S. unemployment rate has dropped over the past three years from about 10% to 7.6%, said Porter, that number is a little deceiving as many people have in fact simply disengaged from the labour market altogether.
“The [U.S.] job market has been so bad for so long that a lot of Americans are just walking away from the labour force,” said Porter. “It might be older folks retiring earlier or younger people staying in school longer than they would have otherwise or people in the middle just giving up altogether in their job search.”