Policymakers running out of options

Even if another recession is avoided, the economic recovery is going to remain unusually lacklustre. It seems unlikely that a divided Congress will pass much of President Obama's $450bn stimulus plan. Fiscal policy will therefore soon add to the other constraints on economic growth. Over the next couple of years, a contraction in Federal discretionary spending is expected to add to the contraction already underway at the State and local level. Meanwhile, the Fed's latest attempt to kick-start the recovery with Operation Twist is unlikely to help much when borrowing costs are already very low. We now think GDP will grow by just 1.5% in 2012 and 2.0% in 2013.