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Fiscal cliff - Global Economics Weekly

Fiscal Cliff Averted?

Global Economics Weekly Brief


A new year, and the fact you're reading this is evidence that the world hasn't imploded. The US economy wasn’t driven off a fiscal cliff and indications suggest stronger growth in UK bank lending. But as everyone knows, a new year doesn't magically make old troubles disappear. February sees the start of the Chinese New Year.



Fittingly it's the year of the snake and there’s plenty that could bite `big time`! First, the (fiscal) cliff may have been navigated, but just like Bilbo, President Obama still has to lead the US economy on a treacherous journey over debt mountains and spending-cut gorges.(USA Present debt today, $16 trillion and increasing daily) Additionally, UK public borrowing remains perilously high, while the eurozone economy looks worryingly very weak. So a Happy New Year. But for the economy and for us all, it’s back to the grind. Another tough year ahead!

US budget deficits (% of GDP)

Source: Group Economics, Congressional Budget Office.

See Special report on the US FISCAL CLIFF reality all the way below..


Fiscal cliff (partly) averted. The $655bn game of brinkmanship has been brought to a partial close with an agreement preventing certain taxes from rising, sucking $212bn out of households’ budgets in 2013. The equivalent of $2,200 for a family of four. See US Fiscal Cliff Deal below* for further comment (also - See US fiscal cliff). But policy-makers are giving with one hand and taking with another. The expiry of a separate temporary reduction in payroll taxes will actually leave 77% of households with a higher tax bill in 2013 according to one Washington think-tank. In fact, the level of fiscal tightening in the US this year will be higher than anything the UK has experienced since beginning its budget deficit reduction efforts. The US has a bit of ‘gas in the tank’ with growth ticking along at a reasonable pace but the economy is far from immune to cuts of this size. More tax rises to come!


But ‘three gorges’ loom. The deal on taxes is only part of the story. Congress now faces a fraught couple of months. There are three main obstacles to overcome: the debt ceiling at the end of February; the automatic defence and welfare cuts in early March; and the need to renew the US government’s permission to spend any money at all by 23 March. The cliff may be in the rear-view mirror, but ‘three gorges’ lie ahead. Watch this space!

US central bankers divided on quantitative easing. 2012 saw the US Fed making some bold changes to how it conducts monetary policy, mainly by linking policy decisions directly to the performance of the labour market. Rather than set an end date to its latest quantitative easing (QE) programme, the Fed said it would continue until there was “substantial improvement in the labour market.” But the minutes from the December meeting suggest the committee is not united. “Several” members suggested asset purchases may need to be halted before the end of 2013, rather than wait for the labour market to improve. But with unemployment remaining elevated, a halt to QE is unlikely in the near-term. More unemployment and QE around the corner!

UK: working more, doing less. A persistent theme of the post-crisis UK economy has been surprisingly strong employment gains (mostly part-time) in the face of weak GDP growth. As a result productivity has nose-dived. Current output per hour worked in the UK private sector was last this low in Q1 2005 and is nearly 4% below Q3 2011’s level. The upshot for the economy is clear. Firms are unlikely to grant generous wage rises if their employees aren’t producing more. More tough times ahead!

UK borrowing higher, but one-off effects to help in 2013. Public sector borrowing came in at £17.5bn in November, around £1.2bn higher than November 2011, as government spending rose. The public finances continue to disappoint with the deficit £8.3bn higher than this time last year. Coupon payments from QE and revenues from the 4G auction will help to tame borrowing in the remainder of the fiscal year. These are a welcome helping hand but won’t provide permanent support to the public purse. March’s budget may have to include more difficult choices. The public sector need to stop spending (wasting) money they have not got!

The eurozone and the UK enter 2013 with little by way of economic momentum. The eurozone’s composite Purchasing Managers' Index, covering both manufacturers and service providers, delivered a reading of 47.2 in December. It was the 11th straight month of a sub-50 reading, indicating contraction. In the UK, manufacturing jumped to 51.4, the highest reading since February. But services sank to 48.9, the lowest reading since April 2009, apart from December 2010’s snow-related contraction. A reduction in new business was the culprit as economic uncertainty continues. Eurozone in very deep trouble!

Japan's central bank could be set for a radical change. To help tackle the economy's persistent deflation, Japan's new prime minister wants the central bank to bump its inflation "goal" to 2% and may force them if they fail to cooperate. He has also floated the idea of the Bank of Japan purchasing construction bonds – government debt issued to fund public works – in unlimited quantities. Such deficit financing is hugely controversial and would mark a radical departure from the accepted orthodoxy of central bank independence that has been a pillar of economic thinking for the past two decades. Japan still in free fall!

China Export Growth Collapses as World Recovery Slows - click on the connection below for comprehensive information.
http://www.bloomberg.com/news/2012-08-10/china-july-exports-rise-1-vs-economists-estimate-for-8-.html


S P E C I A L -

* US fiscal cliff deal


Halfway there
The US has agreed a deal that partially averts the fiscal cliff – a $655bn package of tax rises and spending cuts that was due to take effect on 1st January. This is good news for the immediate health of the US economy as going over the cliff could have prompted a fresh recession. However, many difficult choices remain and more progress is needed before the end of February.

The agreement
The agreement covers a range of taxes and unemployment benefits. Its main points are:

· a permanent extension of the “middle class tax cuts”, worth $212bn this year, or $2,200 a year to a family of four
· taxes on the wealthiest will rise as planned. Income tax will rise to 39.6% for those earning more than $400,000 and a variety of tax exemptions phased out
· business taxation will be $60bn lower in 2013; and
· 2 million Americans will have their unemployment benefit extended for another year.

What’s next?

As part of this agreement Congress has given itself another two months to address government spending. If Congress fails to reach a second deal then automatic cuts to the budgets for defence and entitlements will kick in. These cuts are called the sequester. This second deal should also include agreement over raising the debt ceiling, the legal limit on how much public debt the US is allowed to issue. On top of all this Congress must also authorise departmental spending before the end of March to avoid a Government shutdown.

The public finances
Like many countries the US is running a very high public deficit, its tax revenue does not cover the amount it is spending. This agreement means that the tax revenue received by the US Government will be a lot lower than previously planned.

The agreement means that the 2013 deficit is now projected to be $330bn higher at $941bn or 5.9% of GDP. This is still a big fall from 2012’s deficit of $1.2tn (7.5% of GDP). The next deal must tackle spending and we expect it to reduce the deficit, though not by much in the short run.

US budget deficits (% of GDP)

Source: Group Economics, Congressional Budget Office.



What do you think about this?

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More Economics and Business Inspiration:
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by Colin Thompson ISBN: 978-1-84549-289-2

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Note: About the Author Colin Thompson

Colin is a former successful Managing Director of Transactional/Print Manufacturing Plants, Print Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives and Non-Executive Director, helping companies raise their `bottom-line` and `increase cash flow`. Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, business and educational models on CD-ROM's/Software and over 400 articles published on business and educational subjects worldwide. International Speaker and Visiting University Professor.


Read more newly added articles, which you can add to, on NewsUSA-MyFeedPortal: http://newsusa.myfeedportal.com/i/libor-scandal <--- The Largest Scandal The World has Ever Seen - The LIBOR Scandal.


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Fiscal Cliff Averted!

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