US GDP set to grow as Eurozone shrinks

Tim Wallace
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STEADY growth in the US economy means interest rate cuts are no longer needed, said Richmond Fed president Jeffrey Lacker (pictured right) in a speech yesterday.

GDP will grow by between two and 2.5 per cent despite the Eurozone slowdown, he said, on the same day as PwC published grim forecasts for the major euro economies.

“I’m hard pressed to see the rationale for further monetary stimulus,” said Lacker.

“The doubling of inflation this year, despite unemployment averaging nine per cent, undercuts the hoary notion that ‘slack’ in the labour market can be counted on to keep inflation contained. Inflation can accelerate despite elevated levels of unemployment.”

Lacker joins the Federal Open Markets Committee, which determines interest rates, next year, as it rotates through local Fed bosses.

Meanwhile PwC warned that even a relatively mild resolution to the Eurozone crisis could force the largest euro economies into deep recessions.

A series of orderly defaults, for example, could be expected to cut Germany’s GDP by two per cent next year and one per cent in 2013, while the emergence of a new currency bloc would cut 5.5 per cent from Italy’s economy and 4.5 per cent from Spain’s in 2012 alone.

“Next year is likely to be dominated by uncertainty and potential volatility,” said PwC economist Yael Selfin.

“The fallout from the sovereign debt crisis is threatening to plunge the Eurozone back into recession and the euro is likely to depreciate against other major currencies as capital flows towards safe havens next year.”