2013-01-18 05:50 GMT

Fiscal negotiations hope to avoid destabilizing a fragile US economy

The remainder of 2012 and early 2013 has thus far been dominated by the “fiscal cliff” negotiations in Washington and the unfinished business associated with them. The repercussions of these political decisions will have far-reaching consequences on the economy, confidence, financial markets and perhaps most importantly, the US credit rating. In the immediate sense, automatic tax increases 
and mandatory spending cuts set to go into effect in January, amounting to as much as 5% of GDP would – if implemented – most likely drive an already fragile US economy into recession. “By contrast, a ‘kicking the can down the road; solution or underlying mentality of extending all tax cuts and forestalling any spending cuts would only simply defer many tough decisions and would likely lead to another US credit downgrade and weaker business and consumer confidence.” warns Larry V. Adam, an analyst at Deutsche Bank.

We believe that Congressional leaders will ultimately avoid these two extreme alternatives and form a compromise, however in a two- stage process. The first phase will include not extending the payroll tax cut and additional unemployment benefits into next year. The proceeds will be used as a down payment to avoid the implementation of the “sequestration” (i.e. automatic) cuts and allow the Bush-era tax cuts to be extended for an additional six months. In addition, leaders will then develop a “framework” of reduced tax deductions, possible tax increases, targeted spending cuts and entitlement reform to agree upon a more comprehensive long-term solution in a second phase of negotiations early next year. Ultimately, “assuming a fiscal cliff compromise is achieved in Washington that prudently balances growth and austerity, a recession will likely be averted.” Adam suggests. However, the US economy will grow at a tepid 2% rate over 2013 as a whole, as the “fiscal cliff,” even in its modified form, could cause a drag of approximately 1.5% to GDP.-FXstreet.com

2013-01-18 09:00 GMT

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2013-01-18 09:30 GMT

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2013-01-18 03:43 GMT

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2013-01-18 03:37 GMT

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2013-01-18 01:16 GMT

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