As 2012 comes to a close, investors are looking forward to 2013 and forecasting the potential direction of the economy and financial markets. However, much of the U.S. economic outlook in 2013 will depend on what happens in Washington in the next few weeks, with the looming fiscal cliff and its Dec. 31 deadline.

I am confident that Washington will resolve--at least temporarily--the fiscal cliff issues, most likely through a modest compromise where Congress and the President reach an agreement that includes a combination of tax increases and spending cuts.

In the instance of a modest compromise, the core of the fiscal cliff will be avoided allowing us to look forward to 2013. Under that scenario, the U.S. economy should begin to expand at a slightly above trend pace starting in the second half of 2013.

My macroeconomic predictions for 2013 include:

• Gross domestic product will grow 2.2 percent in 2013, a modest improvement over 2012.
• Unemployment will reach about 7.8 percent by year-end, improving to 7.3 percent in 2013.
• Interest rates will stay relatively flat early 2013 and increase only modestly as the year progresses, while inflation will reach 2.2 percent in 2013, a modest increase.
• Oil will trade in a range of $85 to $90 per barrel through year-end 2012 and throughout 2013, trading up in a range from $87 to $98.
• Business spending will increase about 4 percent in 2013, half of 2012’s pace.
• Sales of new homes will rise 8 percent in 2012, contributing about half a percent growth to U.S. GDP in 2013.
• The U.S. trade deficit will rise 5 percent in 2013, the same pace as it did in 2012.
• Retail sales will grow 5 percent in 2013 after modest holiday sales.

Other predictions include:

Equities: Uncertainty to follow into Q1, more upside in second half of 2013

Fixed Income: No major changes in the first half of 2013 and interest rates will pick up in second half.

Currencies: The U.S. dollar will get slightly stronger versus the euro in the first half of 2013, the Yuan will gain ground while the yen will continue to structurally lose.

Commodities: Recovering from low levels reflecting a modest economic rebound in China and an ongoing U.S. recovery in 2013.

Just the fear of driving off the fiscal cliff dampens the potential for economic growth. Consumers will withhold retail spending and investors will take their cash to the sidelines in 2013, if the fiscal cliff issue and the key issues of the budget cuts are not properly resolved.

By
Reto Gallati, Ph.D.

Reto Gallati, Ph.D., is the president and CIO of Raetia Investments, LLC. Prior to owning his own firm, Gallati was the head of investments and chief risk officer at Nuveen Investments. In addition, he has held senior positions at several Wall Street firms, including deputy chief risk officer at Putnam Investments and deputy CIO and senior portfolio manager at Goldman Sachs Bank in Zurich. Gallati’s most recent book, Investment Discipline: Making Errors Is OK, Repeating Errors Is Not OK, provides best practices in investing and shows readers how to develop an investment plan based on thoughtful objectives and sticking to it for the long haul. For more information, visit http://raetiabooks.com.