Citi’s tepid 2.2% U.S. GDP growth forecast assumes the Bush Tax Cuts will be extended…Should this assumption be wrong, then GDP estimates would need to be slashed nearly in half:
Citi’s Tobias Levkovich:
The impending Bush tax cuts expiration at the end of the year is quite critical since most forecasts for GDP growth assumes some extensions. If all 36 tax relief programs expire, it could take more than 100 basis points out of the 2.2% real GDP growth forecast that Citi is using for 2011 in the US. Indeed, it is quite probable that EPS trends for the S&P 500 would be negative year over year versus our current forecast of a near 7% improvement. Moreover, we suspect that we are far from alone in this view. Thus, the lame duck Congress will have to shake off its post election blues and work towards some agreement on tax cut extensions. While ideological battle lines can be drawn, the lack of clarity on this overwhelming issue leaves one with great uncertainty about both consumer and corporate spending intentions heading into 2011. Intriguingly, in a seemingly post election about face, the White House is now hinting at a possible extension of all tax cuts rather than for those making less than $250,000.
However, it would be nice to know how much GDP might be hurt if tax cuts were extended for everyone except America’s richest. There’s already White House support to extend tax cuts for everyone earning less than $250,000, after all. The Republicans just want to give the richest extended tax cuts as well… while complaining about the deficit.
(Via Citi, The Next Catalysts, Tobias Levkovich, 4 November 2010)