The looming fiscal cliff in the US has now replaced the actions of the Fed and the ECB as the major macro talking point in the financial markets. Although most investors expect that the American political system will find a way out of the large fiscal tightening which is currently scheduled to take place in 2013, there is a great deal of uncertainty about how and when this will be accomplished. In the meantime, concerns about the fiscal cliff have now clearly started to damage capital goods orders in the business sector, which last week dropped in a manner which is normally seen only in recessions.
The US economy remains fragile, and a large downward shock to capital spending, which now seems inevitable in the final quarter of the year, is certainly not what the doctor ordered. It may well lead to a further slowdown in GDP growth in Q4, from the already anaemic 1.8-2.0 per cent rate which seems likely for Q3. However, unless policy makers in Washington prove unable to break free of political gridlock after the elections on 6 November, it still seems improbable that the economy will slide into recession early next year. Read more