The struggling U.S. economy could get much worse, snuffing out growth in both the United States and Canada, if the U.S. falls over the looming “fiscal cliff”, the Conference Board of Canada notes in a new report.

The research group’s U.S. Outlook-Autumn 2012 forecasts real gross domestic product to grow by a tepid 2.3% this year and by 2.4% next year. But this outlook assumes that Congress and the White House will reach an agreement to avoid automatic spending cuts and tax increases scheduled to kick in early in 2013.

“The U.S. economy will take a major step toward, finally breaking free from the clutches of the 2008-09 recession, but only if the United States Congress and Administration manage to make some headway in solving the nation’s daunting fiscal challenges,” says Kip Beckman, principal economist. “Concerns about how Congress will deal with the rapidly approaching fiscal cliff are having a strong negative effect on both consumer and business confidence.”

The “fiscal cliff” refers to the combination of tax increases and spending cuts totaling more than US$700 billion — five per cent of the U.S. economy — that are set to take effect automatically in January if other deliberate fiscal policy action is not taken.

The Conference Board notes that Congress and the White House have several options as the deadline approaches, but the default option is to do nothing. While the federal balance sheet would improve immediately, the Conference Board says the United States is too fragile to withstand the combined impact of tax increase and spending cuts and would fall back into recession in the middle of 2013.

The second option would be to extend the current tax and spending policies into 2013. Maintaining the fiscal status quo would have a positive short-term positive effect on U.S. growth, but it would also likely lead to a U.S. credit rating downgrade. Ongoing trillion dollar annual deficits would hurt the economy over the longer term, the Conference Board suggests.

A final option, the one on which this outlook is based, The Conference Board has based is outlook a third option — an agreement between the Congress and the White House that allows the U.S. federal government to gain some control over its long-term finances and enables the economy to continue its modest growth into the medium term.

Not all the news about the U.S. economy is gloomy, the Conference Board says. Most firms are in excellent financial shape, banks are well-capitalized and have resumed lending, and households have made a huge dent in their debt burdens. The troubled housing market is also showing signs of life.