NOMURA: Government Tightening Will Slash 3% Of GDP In 2013, And That's Being Optimistic

Butcher knife, horror

Photo: Flickr/Dave Parker

In the wake of the Super-Committee failure, Nomura’s David Resler notes that ultimately this doesn’t affect the economy very much in the short-term.But in 2013, watch out.

Without additional policy action the US economy will face a fiscal drag in 2013 in excess of 3% of GDP. This reflects the combined effects of discretionary spending caps under the BCA, additional spending cuts through the automatic sequester, the scheduled expiration of Bush-era tax cuts, and other taxes that are scheduled to increase automatically at the beginning of 2013. Our baseline forecast of the US economy in 2013 assumes that Congress acts to offset most, but not all, of these automatic changes after the election. The forecast is based on the assumption that fiscal drag in 2013 is higher than it is in 2012, but substantially less than current law would imply.

Got that? Here comes a 3% drag, and that assumes that the Congress reverses a bunch of spending cuts. Oof.

Whoever wins the 2012 election is going to have a rough first year.

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