US Fiscal Cliff biggest threat to global economy, says Fitch

Fitch Ratings has identified the so-called US Fiscal Cliff as the biggest near term threat to the global economy.

If the US fell over the cliff edge, that is to say there is severe fiscal tightening, then the global economy could be tipped into recession.

“At the very least it would be likely to halve the rate of global growth in 2013,” Fitch said.

Tax increases and government spending cuts are currently written into US law to the tune of $600bn, or some 4% of GDP.

Most of this would take effect in early 2013, leading to an overall fiscal contraction of more than $800bn, or 5% of GDP, according to figures from the US Congressional Budget Office. Fitch believes the cuts will be “pared back to a more manageable 1.5% of GDP”.

“However, if the fiscal cliff did involve $600bn of permanent fiscal tightening, it would knock almost two percentage points of our 2013 growth forecast of 2.3%.”

“According to the Oxford Economics model used in our alternative scenario analysis, a US fiscal shock would be exported to the rest of the world via a sharply weaker US dollar and asset prices, lower US price and wage inflation and heightened risk of deflation, and the impact on commodity prices.”

Export countries such as China and Japan would feel the greatest effects, in terms of falls in GDP, according to Fitch’s model. Another danger is that trading partners engage in policy to limit the appreciation of their own currencies against the dollar.

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