Will US Fiscal Headwinds Slow Down Growth In Q4?

 

Despite the looming ‘fiscal cliff,’ the US economy is unlikely to fall back into recession in 2013, especially when some good numbers are coming out towards the end of the year, says Julian Callow, chief international economist at Barclays Capital.

US economists have recently upgraded growth forecasts to an annual clip of 2.8 percent from an earlier pace of 2 percent for the fourth quarter, signaling a pick up in growth. So, heading into 2013, we are witnessing a relatively sustained economic expansion in the US economy; and with the Fed clearly behind with full support, it’s just a question of magnitude and measures, Julian said. It’s unlikely the Congress will do something suicidal though there will be a lot of brinkmanship involved in the negotiations leading up to the fiscal deal, he added.

President’s Obama’s biggest challenge will be to negotiate a long-term deal rather than trying out a short-term fix. The US can still manage an annual growth of 1.5 percent in 2013, which translates into about $200 billion in additional goods and services, he said. If the US goes over the fiscal cliff, i.e. budget cuts and tax hikes are implemented, global GDP – which is currently running at 3/3.25 percent, will slow down. However, with China growing at over seven percent this year and hopefully possibly managing to clock more than seven percent next year after the current political uncertainty over leadership transition gets over, the impact should be lower, Julian noted.

That being said, if too many hardliners get selected in the next Chinese government, the growth may decelerate since there’ll be a risk of reforms slowing down. Chinese GDP contributes about 15 percent to the world output, and the latest global recession could have been a whole lot worse had China not grown at about ten percent in the last few years, Julian said.

Barclays, however, doesn’t expect any significant shift in economic policies as the new breed of younger leaders take over, but expect them to nurture this transition and maintain the growth momentum.

They would most likely continue to raise the living standards without creating significant inflation or asset bubbles by over heating the economy, he said. The new leadership will also have to focus on infrastructure investments, and address issues related to environment and corruption. Hence, the leadership change will most likely be an incremental affair rather than a fundamental shift in regime, he concluded.

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