The US economy is going from bad to worse and will not fully recover until structural problems caused by the collapse of the housing market and the financial crisis are resolved, according to Capital Economics.
Predicting growth rates of 1.5 percent in 2012 and 2.0 percent in 2013, Roger Bootle, the managing director of Capital Economics believes there is a risk of the US economy falling back into recession over the next few years.
“Households have made only limited progress in reducing their debt burdens following the collapse of the housing bubble,” said Bootle in a research note on Wednesday.
“As the deleveraging continues, we expect spending to remain unusually weak over the next couple of years,” he said.
Investment by businesses remains one of the bright spots in the US, but Capital Economics believe renewed financial turmoil on financial markets risks future investment being put on hold by business leaders nervous about where this will all end.
“The crisis in Europe and a more widespread easing in global demand means that the export sector won't be able to offset the weakness in domestic demand,” warns Bootle.
Despite US President Obama’s jobs plan, Bootle is predicting no fall in the unemployment rate even if the economy avoids another recession.
“Policymakers would never admit it, but there is little more they can do to kick start a recoverythat, even with the benefit of an unprecedented stimulus during its first two years, has been unusually lackluster,” said Bootle.
“What has been dubbed Operation Twist might succeed in reducing lowering 10-year Treasury yields a little, but we doubt it will have any impact on the wider economy because the cost of borrowing isn't the problem,” he added.
“Households aren't in a position to borrow more or even refinance their mortgages to take advantage of these lower rates. Similarly, businesses don't have the confidence to invest regardless of how cheap the funds are,” said Bootle.