Deadlock in US 'would hit Asia hard'

If the worst-case scenario for negotiations within the US government on its looming "fiscal cliff" comes to pass, it could be a disaster for the global economy, a financial expert said.

According to legislation passed earlier, certain federal tax increases and spending cuts will kick in automatically in January unless the White House and Congress can compromise on a revised strategy to tackle the United States' fiscal deficit.

The January deadline has been dubbed the fiscal cliff, and if the US stumbles over it, it will lead to capital outflows from the Asia-Pacific region, since investors' demand for stocks and bonds will decline, said Chris Ferrarone, global equity strategist for UBS Investment Research.

The outcome of this month's US general election did not change the fundamentals of the US economy, and its gross domestic product is expected to expand 2.1 per cent this year and 2.3 per cent next year, Ferrarone said via telephone conference from Hong Kong.

The No 1 issue for global investors right now is concern over the fiscal cliff, he said. Without a successful renegotiation, its impact is estimated to be about 3.25-3.5 percentage points of GDP growth.

In other words, falling over the fiscal cliff would lead to contraction of the US economy next year, he said.

Other analysts also believe that this worst-case scenario would be a disaster, causing a sharp recession of the US economy next year that adversely affects the global economy too, he said.

"It would be a shock not only for the US economy and US corporate earnings but it would also be a shock to global economy," Ferrarone said.

He noted that the global economy was already fragile as Europe is still mired in its sovereign debt crisis, and the economies of some countries in Asia are also slowing down. So investors will not have any appetite for risky assets in the Asia-Pacific region, potentially leading to capital outflows.

While it is possible that the US Democratic and Republican parties will reach agreement before the end of the year, it is unlikely, he said.

"It seems to me that the consensus of investors is that there will be some sort of postponement of the fiscal cliff," Ferrarone said.

He expects intense negotiations between the Democrats led by newly re-elected President Barack Obama and the Republicans, who retain control of the House of Representatives. Obama will have a short honeymoon period, Ferrarone said.

He said investors would look at indications over the next few weeks that the Republicans and Democrats are willing to compromise regarding tax rises and spending cuts.

On US-China trade, Ferrarone does not expect tensions to escalate. Obama did not vow to impose currency-manipulator status on China as his rival Mitt Romney did during the election campaign, he noted.

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Article source: http://www.thethailandlinks.com/2012/11/11/deadlock-in-us-would-hit-asia-hard/