Economists say US debt crisis is on the horizon

Tim Wallace
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SOVEREIGN debt is as big a problem in the US as it is in the Eurozone, and only a crisis looks likely to prompt its dysfunctional government into taking action, Legal and General Investment Management (LGIM) warned yesterday.

Figures out yesterday showed the country’s service sector expanded in March, but LGIM economist Tim Drayson said the longer-term growth outlook remains weak.

The US congressional budget office (CBO) expects a fiscal tightening of 2.6 per cent next year as tax breaks expire, but even then sees debt rising to over 90 per cent of GDP by 2022.

LGIM thinks the CBO’s GDP estimates are far too optimistic, neglecting to take into account the damage done to the supply side of the economy by the financial crisis – and estimates debt will reach 110 per cent of GDP by 2022, and keep rising.

Such “unsustainable debt dynamics” mean welfare and healthcare reform must be tackled to cut spending, said Drayson.

“It is probably going to take a crisis to knock some heads together and force the necessary corrective action to restore solvency,” Drayson warned.

However, in the short-term, the outlook remains better than in Europe.

The US service sector expanded strongly in March, with the ISM non-manufacturing index coming in at 56, firmly above the “no change” level of 50.

Employment rose strongly in the month, according to yesterday’s ADP national employment report, with an extra 202,000 jobs created, indicating a return to solid growth in the first quarter of 2012.