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Deutsche Bank’s Hooper Sees 3% Growth If Fiscal Cliff Is Avoided

U.S. economic growth may quicken to more than 3 percent next year as consumers gain confidence and spend more on deferred purchases if Congress avoids the fiscal cliff, Deutsche Bank AG chief economist Peter Hooper said.

“This is an economy that has been laying the foundation for a considerably stronger performance,” Hooper said today in an interview at Bloomberg in Washington. “What has the potential to drive it a good deal more rapidly is a lot of pent-up demand that’s been built up by a period of very sluggish, by historical standards, recovery from a very deep recession.”

Spending on homes and durable goods remains “well below” the level needed to keep pace with the normal trend of economic growth and the expanding population, said Hooper, who worked for 26 years as an economist at the Federal Reserve Board in Washington.

Whether the potential translates into faster growth depends on lawmakers avoiding the automatic spending cuts and tax increases of more than $600 billion set to take place starting in January, he said.

Failure to do so risks a shock to financial markets of even greater magnitude than August 2011, Hooper said. Standard & Poor’s stripped the U.S. of its top credit rating for the first time on Aug. 5, 2011, amid Europe’s deepening debt crisis.

“Certainly it’s at least August 2011, it’s a lot worse than that,” Hooper said today. “August 2011 was gridlock in action and it did not result in a recession. You’re talking about a much bigger near-term hit to the markets.”

U.S. Stocks

The swings in U.S. equities in the week after the Aug. 5, 2011, downgrade were unprecedented in the history of the American stock market, according to data compiled by Bloomberg and Birinyi Associates Inc. The S&P 500 Index plunged 6.7 percent on Aug. 8, 2011, its biggest drop since December 2008, in the first trading session after the downgrade. S&P cited lawmakers’ inability to agree to a budget plan that would cut spending enough to reduce record deficits.

If the so-called fiscal cliff isn’t averted, the economy will shrink 0.5 percent next year and joblessness will climb to about 9 percent, according to the Congressional Budget Office.

Economists project the U.S. largest economy to expand by 2 percent next year, the median of 89 estimates in a Bloomberg survey.

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