Recoveries are not supposed to be interrupted by a quarter of negative growth. Yet the US economy, which shrank by 0.1 per cent in the last three months of 2012, is still struggling to achieve escape velocity.
Most of the shrinkage can be attributed to one-off factors, such as bad weather, the decline in business inventories and a sharp drop-off in spending on defence. As such, many forecasters expect US growth to resume at something close to the trend rate of 2.5 per cent in the first three months. But there is little room for complacency. Now is not the time for tightening – either of the monetary or the fiscal kind.
The most significant threat to US growth in 2013 comes from the impending fiscal sequester, which is due to fall on March 1. So far, the markets have taken a relaxed view of the fiscal shenanigans. But the risk that Congress will fail to strike a sensible bargain and thereby automatically trigger deep spending cuts is real. Indeed, the Republican decision last week to push back the battle over the sovereign debt ceiling until May has raised their incentive to play hardball on the sequester.