IMF warns on US fiscal cliff
The International Monetary Fund has renewed warnings about the looming fiscal cliff in the US after predicting “tepid” growth in the world’s largest economy.
In its Article IV consultation on the US, the Washington-based lender warns that ongoing uncertainty over the country’s fiscal plans threaten to knock growth down to zero next year.
The IMF says there is a real possibility that ongoing deadlock in the country’s “highly polarised politics” could block agreement on issues such as automatic spending cuts and the expiration of tax provisions.
“If all temporary tax provisions were to expire and the automatic spending cuts to take effect, the 2013 fiscal contraction would be very sizable (over 4 per cent of GDP),” the fund’s review says.
“This ‘fiscal cliff’ would reduce annual growth to around zero, and the economy would contract in early 2013.”
But the IMF says damage to the US economy could be “substantial” even if the fiscal cliff is resolved quickly, especially if consumers and businesses continued to feel uncertain about the likely direction of tax and spending policies.
Even if the existing fiscal cliff is successfully unwound, the fiscal problems of the US will not ease for long.
The IMF concludes: “The federal debt ceiling will need to be raised most likely in early 2013, bringing back the risk of heightened uncertainty and financial market disruption.”
Last month, the Bank of America Merrill Lynch fund manager survey showed that 19 per cent of asset allocators now regard the US fiscal cliff as the biggest tail risk, making it the largest area of concern after the eurozone debt crisis.
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