With the US fiscal cliff less than three months away, the International
Monetary Fund has chimed in this week with its concerns for both the US and the
global economy as a whole. The US is edging towards an enormous fiscal
tightening the like of which we haven’t seen since 1947. The nerves, pressure
and speculation surrounding the issue will only going to intensify as US politicians
argue and stall their way through the final quarter of the year.
The IMF has estimated that if a deal isn’t reached to avoid a
full-blown fiscal cliff, then the US could well plunge into recession next year.
The organisation estimates that the US economy will grow by 2.1% in 2013, while
the impact of the fiscal cliff would weigh on GDP by 2.2%.
While the fiscal cliff does not appear to threaten a global
recession next year, it would certainly have a significant impact; rating
agency Fitch has estimated that it would cut global growth in half. As far as
eurozone growth is concerned, developments from within the region could easily tip
the IMF’s 2013 eurozone GDP forecast of 0.2% well and truly into recession
territory regardless of the fiscal cliff. However, the organisation sees the
failure to reach a compromise on the fiscal cliff knocking 0.4% off growth,
which would seal the deal regardless.
If an agreement between the Republican controlled Congress and
Democrat controlled Senate, it is highly unlikely that the payroll tax cut will
be extended - there appears to be consensus on this issue. The expiration of this
tax cut then will likely shave 1.0% off US GDP, which is nearly half the amount
that the IMF is estimating of a full-blown fiscal cliff. This would leave
global growth down around 2.6% in 2013, instead of the 3.6% the IMF is
anticipating on the assumption a deal is reached. Unless US politicians pull a
rabbit out of their collective hat, the fiscal cliff issue is likely to end in pain
for all concerned, just how much pain is the real question.
Richard Driver
Currency Analyst
Caxton FX
