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News Release

Improving Growth in US Despite Fiscal Drag, Ongoing Stagnation but Without Crisis in Europe, and Increasing Commitment to Markets in Latin America

April 1, 2013

Contact:    Brian Reil    (202) 454-1334

Washington, DC—Economists at the Peterson Institute for International Economics forecast:

  • Slow strengthening of growth for the United States to 2.3% in 2013 outpacing the sequester, accelerating to 3.1% in 2014 and 3.3% in 2015, with continued QE3;
  • Continued stagnation in Western Europe, with zero growth for the euro area in 2013, but no crises resulting from the present turmoil surrounding Cyprus and Italy; and
  • Upside surprises for 2014–15 in Latin America as Argentina and Venezuela potentially reverse unsustainable policies and Mexico enacts major energy and telecommunications reforms.

David J. Stockton, formerly Director of Research and Statistics at the Federal Reserve Board and now senior fellow at the Institute, predicts that the US economy will continue its slow recovery, achieving 2.3 percent growth in real GDP in 2013. An underlying improvement in household spending will be largely offset by the fiscal consolidation of the budget "sequester." Stockton's outlook for 2014 is for a more noticeable step up in growth to 3.1 percent, as some of the drags on activity continue to wane. He expects growth to pick up further in 2015 to a pace of 3.3 percent.

Unemployment will remain above the 7 percent mark through 2014, before dropping below 6.5 percent in the second half of 2015. Stockton anticipates price inflation to remain below 2 percent over the next three years. To reach its policy thresholds, Stockton therefore expects the Federal Reserve to continue an aggressive program of quantitative easing (QE3) through mid-2014, with QE3 purchases totaling $1.5 trillion.

For 2013–14, PIIE regional experts forecast zero growth overall in the euro area, meager growth in the United Kingdom but considerable improvement in Japan (to 2.0 percent average), and reasonably steady growth in China of 8.5 percent. Stockton therefore forecasts that global activity will have a roughly neutral effect on US growth in 2013, before providing a small boost to net trade in both 2014 and 2015.

For the euro area, Peterson Institute Senior Fellow Jacob Funk Kirkegaard forecasts that 2013 will be another year of stagnation. Contraction in the first half of the year, followed by a modest recovery in the second half of the year, means no growth for 2013. Germany will continue to outperform the rest of the euro area, but will feel the effects of its neighbors' recessions, and the French outlook is shaky at best.

Kirkegaard maintains that the revived perceptions of turmoil in Europe, especially related to the problems of Cyprus and Italy, are nonetheless overblown. Kirkegaard contends that there is sufficient European political consensus such that no crises are in the offing at present—historically, political instability in these countries is a common occurrence that should not disrupt general financial stability. Kirkegaard expects a new, weak technocratic government to take office in Italy after a period of hard bargaining among various factions. There could be more banking crises in the euro area, Kirkegaard predicts, but not systemic ones, with additional bail-in costs imposed on new classes of creditors.

Barbara Kotschwar, research fellow at the Institute, explains that after a decade of reasonably stable and strong growth, Latin America remains split between 21st century socialists and 21st century capitalists. Recent developments may herald an end to the viability of the socialist model in Argentina, Cuba, and Venezuela, among others. On the other hand, Mexico has taken some bold steps to consolidate its 21st Century capitalist model, removing some seemingly intractable obstacles to growth. President Enrique Peña Nieto's reforms of the education, telecommunication, and energy sectors may give Mexico a much-needed economic boost and open room for foreign investors eager to break into Mexico's markets.

Following the death of President Hugo Chavez of Venezuela, Kotschwar expects a weaker brand of his socialism to take hold there. Mounting inflationary and exchange rate pressures will force the country to scale back on its spending, she says, including far-flung foreign aid spending and costly energy discounts to Cuba and other neighboring countries. In Argentina, inflation remains higher than the country admits and its foreign currency reserves are declining rapidly —Kotschwar forecasts that will make Argentina's expansionary monetary and fiscal policies unsustainable, as political pressures mount.

About the Forecasters

David J. Stockton, Peterson Institute senior fellow and senior adviser to Macroeconomic Advisers, was chief economist for the Federal Reserve Board from 2000–11.

Jacob Funk Kirkegaard is a senior fellow at the Institute and the leading analyst in the United States of the euro area crisis.

Barbara Kotschwar is a research fellow at the Institute and an expert on Latin American political economy as well as a contributing author to PIIE's trade studies.

About the Peterson Institute

The Peterson Institute for International Economics is a private, nonprofit, nonpartisan research institution devoted to making globalization sustainable and beneficial through the analysis of international economic policy. The Institute's full-time staff of 50 includes 20 senior researchers, all with policy experience, covering macroeconomics and international finance, global trade and investment, and studies of the world's major economies. Support for the Institute's programs is provided by a wide range of charitable foundations, private corporations and individual donors, and from earnings on the Institute's capital fund.

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