At the last possible moment, Congress and the president arrived at a compromise that resolved part of the fiscal cliff. Although there was a sense of relief in Washington and nationally that the worst aspects of the impending tax increases and spending cuts were dealt with, there is still much more work to be done.
What has been dubbed the fiscal cliff is in reality a set of tax and spending changes put in place in July 2011 when the U.S. went through a debt ceiling and a fiscal crisis. The agreement that ended that crisis included a deadline of Jan. 1, 2013. If Congress and the president could not agree on tax and spending changes to reduce the deficit and get the U.S. on a sustainable deficit trajectory, an automatic set of tax increases and spending reductions were scheduled to go into effect: the fiscal cliff.
Of course, no program was agreed on during an election year and we ended up facing the cliff. The cliff really has three parts to it ― tax increases, spending reductions, and the debt ceiling.
Remaining challenges
There are three major challenges facing the administration and the new Congress that need to be addressed in the next two months.
The reductions in discretionary spending have been postponed but not eliminated. In addition, the mandatory portion of the budget needs to be reformed. Without changes in the key drivers of this spending (Medicare and Social Security), debt and the deficit will continue to grow and the U.S. will never get on a sustainable debt trajectory.
The debt ceiling has not been raised. Currently the federal government is right up against the ceiling and will run out of borrowing room sometime in the first quarter.
Finally, looming in the background is a need for tax reform. The current tax and spending structure is not sustainable. Unless the way the U.S. raises revenue is reformed, there will continue to be these intermittent crises as tax revenue falls short of spending.
In the long run, the key to reducing the debt-to-GDP ratio will be generating stronger growth. If GDP rises more rapidly, the economy will be better able to support debt.
Bottom line
Overall, we expect 2013 to be another year of subpar economic growth in the U.S. However, as the fog begins to clear, as the deadlines pass, the amount of uncertainty will be reduced and the impact of the tax increases will be mitigated. At that point, the underlying strength of the U.S. economy is likely to emerge and growth will accelerate. We anticipate a sluggish first half as the economy copes with the political uncertainty and impact of higher taxes, but stronger growth will emerge late in the year to pull the average GDP growth for the year to about 2.0 percent.
Real estate tends to mirror the general economy. The resolution of part of the cliff is likely to have some positive impact on activity as the amount of uncertainty will be reduced. But it is unlikely that there will be a significant impact until the entire cliff is dealt with. C&W expects to see the level of leasing and investment sales activity in the Americas to increase in 2013.
However, as with much of the rest of the economy, when the level of activity picks up will depend critically on the resolution of the balance of the fiscal cliff issues; but in talking to clients, we have a clear sense that real estate markets are building pent-up demand for both leasing and sales that will begin to be activated once there is more clarity. Our sense is that the level of activity will increase at a double-digit pace in 2013 compared with 2012.
While it is unfortunate that the U.S. is in a position where political brinkmanship has an important impact on the economy, it appears that approaching the cliff has had the effect of forcing decisions that otherwise would be avoided. There are more critical decisions to be made in the next few months and the result will be short-term uncertainty and softness followed by longer-term stability and growth.
Of course, how the remaining cliff issues are resolved is important, but having them resolved will be important in clearing the fog and allowing the economic forces currently being held back to push the economy ahead at a stronger rate later in the year. This will be a positive for the real estate sector, leading to stronger activity as clarity emerges.
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Glenn Rufrano |
By Glenn Rufrano
The author is president and CEO of Cushman & Wakefield, the world’s largest privately held commercial real estate services firm, based in New York. ― Ed.
