Although economic growth has been constrained in recent quarters, it will accelerate later this year and into 2014 as external pressures and fiscal drag ease, according to the Economic Advisory Committee (EAC) of the American Bankers Association.
According to the committee, which includes 13 chief economists from among the largest banks in North America, inflation-adjusted GDP growth for 2013 will be 2.1 percent over the course of the year, and is expected to increase to 2.8 percent in the first half of 2014.
The bank economists believe the housing market has finally entered a sustainable recovery. The group sees the housing recovery gaining significant strength this year, with improving construction levels and rising home sales and prices. The committee forecast is that home prices nationwide will rise solidly and residential investment will increase 15 percent in 2013.
“This strong growth demonstrates that housing has finally caught up with the broader economic recovery,” EAC Chair Scott A. Anderson, senior vice president and chief economist, Bank of the West, said.
Consumers are on a stronger financial footing and have regained confidence. The group believes consumer spending will support economic growth over the next two years.
“Higher equity prices and rising home values, along with declining gas and energy prices, have helped consumers cope with rising taxes and reduced federal spending,” Anderson said. “The wealth effect created by rising home values will boost consumer sentiment and spur increased spending.”
The committee believes federal tax and spending policy will exert a smaller drag on growth over the course of next year. The committee’s forecast is for the federal deficit to fall to $650 billion in fiscal year 2013 (down from $1.1 trillion in fiscal year 2012) and below $600 billion in fiscal year 2014.
After slowing in recent months, the group sees job growth accelerating to 200,000 per month next year.
“The 175,000 jobs number for May is an encouraging sign of steady progress in the labor market,” Anderson said. “The strengthening growth in jobs will bring the unemployment rate down to 7.2 percent by year-end. The committee believes the unemployment rate will fall to the Fed’s threshold of 6.5 percent in the first quarter of 2015.”
The committee believes the Federal Reserve will dial down asset purchases before the end of the year.
“The stronger economy and job creation later this year will allow the Fed to reduce its pace of asset purchases,” Anderson said.
While the committee forecasts a slight rise in long-term interest rates, short-term rates will remain exceptionally low as we move into 2014. “Inflation concerns will remain on the back burner, which will constrain increases in long-term rates,” Anderson said.
The bank economists forecast that consumer credit growth will pick up this year, and that delinquencies will continue to show broad-based improvement both this year and next. In both 2013 and 2014, loans to individuals are expected to grow more than 6 percent and loans to businesses will grow by more than 7 percent.
Although the general outlook is positive, the group believes risks remain.
“While the most serious threats have abated, greater-than-expected fiscal drag and weak global economic and financial conditions could still pose downside risks,” Anderson said. “In addition, a premature exit from accommodative policy by the Federal Reserve could hurt the housing recovery and the broader economy.”