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Why the U.S. Economy Will Be Weaker Than Expected in 2012

Anyone who hoped the U.S. economy would get back on track in 2011 was sorely disappointed.

The European sovereign debt crisis and the abysmal failure of policymakers to take effective action undermined any chance we had at a strong recovery.

And what's even worse is that we're in for more of the same in 2012. Indeed, the U.S. economy in 2012 will be even more sluggish than originally thought - and for the same reasons 2011 was a disappointment.

The Organization for Economic Cooperation and Development (OECD) estimates U.S. growth will slow to 2% next year, down from a 3.1% estimate in May. It forecasts growth will pickup to 2.5% in 2013.

Of course, these forecasts are contingent upon Congress finding a way to stimulate the economy and tighten fiscal policy - not an easy balance to achieve. Without such action, U.S. economic growth next year could be as slim as 0.3%, and only hit 1.3% in 2013.

Unfortunately, after a year of failing to reach a debt reduction agreement, there's little chance the government will rise to the occasion next year - especially when most representatives are focused more on reelection than they are resolution.

Furthermore, it's also doubtful that Europe's debt crisis will be contained enough to not severely disrupt the region's biggest nations and cause a credit crunch that ripples through the global economy.

That means another year of major risks.

"Uncertainty remains the watchword for the U.S. economy," said Money Morning Global Investing Strategist Martin Hutchinson. "The risks are still pretty high because no one's sure what the Europe outcome will be."

The likely outcome - U.S. economic growth will fall even lower.

Europe: The Biggest Unknown

The OECD earlier this week reported that Europe's weak monetary union is the main threat to the world economy. The group's 34 member nations, including the United States, will grow 1.9% this year 1.6% next, down from the May predictions of 2.3% and 2.8%.

"Contrary to what was expected earlier this year, the global economy is not out of the woods," Chief Economist Pier Carlo Padoan wrote in the OECD Economic Outlook.



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