US fiscal cliff to take investors on a hair-raising ride

LONDON (ShareCast) - Republican House speaker John Boehner was forced to withdraw his "Plan B" for dealing with the so-called fiscal cliff due to a lack of support in the House of Representatives. Boehner had thought that the Republican majority in the lower house would be enough to push through his proposal to avoid the impending automatic spending cuts and increase in taxes despite opposition from president Barack Obama and Democrats.

However, hard-line Republicans refused to support concessions on tax increases that left Boehner's plan with insufficient votes to push the measure through even through just the House.

Boehner also remarked that it is now up to Obama and Democratic Senate majority leader Harry Reid to make a deal to avoid the fiscal cliff. Yet both the House and the Senate will not reconvene until after Christmas, leaving markets uncertain whether the US government will be able to avoid a situation which the Congressional Budget Office says would lead the US back into recession.

So much so in fact that this is what Nomura economist Lewis Alexander was telling clients on Friday morning: "it seems unlikely that any legislation to address the main fiscal cliff policies will be passed before the end of the year. (...) It may take the imminent threat of a breach of the debt limit in February, or March at the latest, to force an agreement.

"The direct effects of higher taxes and spending cuts, which take effect in January, will probably not be felt immediately. Our forecast for the first quarter - real GDP growth of 0.5% in the first quarter - anticipates some disruption from the contentious debate over fiscal policy. However, it also assumes that three quarters of the fiscal cliff polices are ultimately pushed off. The longer uncertainty persists, the greater the negative impact on the economy."



JM