New warnings to US over 'fiscal cliff'
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Warnings about the looming “fiscal cliff” in the US have re-surfaced one year on from the downgrading of the world’s largest economy by a leading ratings agency.
On 5 August, 2011, Standard & Poor’s cut America’s long-term sovereign credit rating from AAA to AA+ after saying the country’s fiscal consolidation plan was not enough to stabilise the government’s medium-term debt dynamics.
The 12 months since have not been too bad for US assets. The yield on 10-year US government bonds fell from 2.58 per cent a year ago to about 1.50 per cent today while the S&P 500 has risen from 1,199 on the day of the downgrade to above 1,350.
However, the International Monetary Fund warned last week that the fiscal cliff – meaning a significant reduction in the budget deficit which leads to a slowing of the economy – remains the country’s greatest domestic downside risk.
“If all temporary tax provisions were to expire and the automatic spending cuts to take effect, the 2013 fiscal contraction would be very sizeable – over 4 per cent of GDP,” the IMF’s annual health check on the country says.
“This ‘fiscal cliff’ would reduce annual growth to around zero and the economy would contract in early 2013.”
Meanwhile, Capital Economics has cut its 2013 growth forecast for the US from 2.5 per cent to 2 per cent, citing the fiscal cliff and the impact of the eurozone crisis.
Chief US economist Paul Ashworth and senior US economist Paul Dales write: “It seems prudent to incorporate more of the downside risk posed by the so-called fiscal cliff into our 2013 growth forecast.
“On its own, the tightening in fiscal policy that is scheduled to take place next year is large enough to trigger another recession.”
Old Mutual North American fund co-manager Ian Heslop predicts the fiscal cliff will be resolved after the presidential election later this year.
“We’ve still got political deadlock in the US, which if we’re honest is unlikely to be unblocked before November,” he says.
“But I can’t imagine the US politicians being stupid enough to get themselves into a position where the fiscal cliff actually occurs.”
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