More of the same. That's the way 2013 is likely to begin, with continued concerns about unresolved "fiscal cliff" issues and cautious businesses reluctant to hire.
But that could start to change by the second half of the year, if President Barack Obama and his Republican adversaries in Congress make any headway on big issues like simplifying the tax code, reforming costly entitlement programs and reining in huge annual deficits. In fact, 2013 could represent a turning point in which several big problems that have constricted the lackluster recovery start to ease. Here's how the next 12 months might differ from the last 12:
Housing will help boost the economy. After six downward years, the housing market finally bottomed out in 2012 and started to turn around. Bank of America Merrill Lynch estimates that prices will have risen 5 percent by the end of 2012, with at least a 3 percent gain expected for 2013. That will be enough to make housing an important contributor to economic growth, rather than a drag on it, helping create construction jobs and boosting sales of appliances and other products that usually go with new home purchases.
There's no oil spike in sight. During each of the last two years, oil prices unexpectedly surged, forcing consumers to fork over more for gas and depressing consumer confidence. In 2013, gas prices may stay right where they are, around $3.30 per gallon, or even drift lower. That's mainly because a weak global economy isn't expected to start pushing up commodity prices until demand strengthens, which may not happen until 2015. The one obvious caveat is that nobody can predict what might trigger a conflict in the Middle East and push the "fear premium" on oil to new highs.
Greece may finally leave the euro zone. Nigel Gault, chief U.S. economist for IHS Global Insight, says that "we assume Greece will leave the euro zone sometime in 2013." That could happen after next fall's elections in Germany, allowing more wiggle room for Chancellor Angela Merkel or her successor to deal with the fallout. Departing the euro zone would allow Greece to default on its debts and effectively start over with its own currency, providing a cost advantage its uncompetitive economy desperately needs.
Allowing Europe to recover for real. The specter of a Greek default has shrouded Europe in worry for the last three years, largely because it might spread to Spain, Italy and the rest of the continent. But if Greece left the euro zone, it might make it easier for Europe to write off Greece while doubling down on measures to keep Spain and Italy solvent, which is a much bigger priority. Meanwhile, a series of incremental bailout steps has given bondholders time to prepare for a Greek default, which some experts think has helped reduce the odds of a calamity. "The big tail risk of a Eurozone breakup has likely passed," Merrill Lynch recently advised clients.
Investors might finally flee safe assets for riskier ones. Even though the stock market has risen by about 12 percent this year, a lot of investors have kept their money parked in super-safe Treasuries or other types of bonds because they're worried about disruptive events like a fiscal cliff-dive in the U.S. or a breakup of the euro zone. But if those risks fade in 2013, returns on bonds could turn negative and investors might plow money into stocks. "There's a perception of safety [in bonds]," says Russ Koesterich, chief investment strategist for the big asset manager BlackRock. "But some of the things we've thought of as a safe haven may turn out to be less safe." If the flow of funds into stocks picks up, that in itself would push markets higher.
Japan will rebound. Japan's economy has been stagnant for a generation, but new premier Shinzo Abe has indicated he plans to pursue aggressive monetary policies similar to those of the Federal Reserve, which could boost Japanese stocks and send the yen lower, helping Japanese exporters. Some money managers believe Japanese stocks are significantly undervalued and will be among the strongest performers in 2013.
The economy could take off by late in the year. Deliberations in Washington over tax and spending policy will probably drag on well into 2013, but at some point Congress will have to decide something and political dithering will stop holding back the economy. Some forecasters think economic fundamentals are sharply improving, which could set the stage for robust hiring later in the year, and other self-reinforcing developments that will help the economy grow. Investing firm Piper Jaffray, for example, expects the S&P 500 stock index to hit new highs in 2013 and end the year about 20 percent higher than it is now. Beyond the fiscal cliff, an updraft may blow.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.
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