LONDON: The wheels could come off the US economy even before it has shifted out of second gear unless politicians reach a last-minute deal to avoid $600 billion in tax rises and spending cuts that kick in next month.
The rest of the world would be unable to avoid the pile-up if America does fly off the so-called fiscal cliff.
That is why, even in a holiday-shortened week, eyes will be peeled for signs that Democratic President Barack Obama and his divided Republican opponents can bury the hatchet.
The White House on Friday tried to rescue the stalled talks, but there was little headway to resolve what Alan Blinder, an economics professor at Princeton University, called the biggest near-term risk facing the global economy.
Seen from abroad, US policymakers were looking "clownish", the former vice-chairman of the Federal Reserve said: "This will do us a tremendous amount of damage."
Until last Thursday, markets had assumed a compromise would be struck, averting the risk of a relapse into recession. The slow-motion car crash had been so well signaled that surely the drivers would swerve in time?
But after Republicans abandoned a fix proposed by House of Representatives Speaker John Boehner, businesses and households head into the year-end knowing the clarity they crave on tax and spending plans could be weeks away.
"The longer uncertainty persists, the greater the negative impact on the economy," Lewis Alexander, chief US economist at Nomura, told clients.
"It may take the imminent threat of a breach of the debt limit in February, or March at the latest, to force an agreement," he added, referring to the Congressional approval that the Treasury will need to extend its borrowing authority.
THE CRASH HEARD AROUND THE WORLD
By sapping consumer confidence, the political brinkmanship could already be enough to sap short-term US growth.
If America then does tumble over the cliff for more than a few days, triggering fiscal tightening that could reach 4 percent of GDP, the repercussions would be felt around the world via trade and financial links.
"If our economy goes into a recession, especially a serious recession, a deep recession, that's going to hit imports from the rest of the world.
And to the extent that it messes up financial markets, that has a contagion effect," said Martin Feldstein, an economics professor at Harvard University.
Like Blinder, he was speaking on a conference call organised by Foreign Affairs magazine. Indeed, the resulting turbulence in financial markets could end the period of relative calm enjoyed by the euro zone, said Christian Schulz, an economist at Berenberg Bank in London.
Failure to put the US budget on a more sustainable path could well crush hopes that the world's largest economy is finally shaking off the effects of the financial crisis and returning to a path of steadier if not spectacular growth.
Credit Suisse on Friday raised its forecast for fourth-quarter gross domestic product growth to an annualised pace of 1.8 percent from 1.1 percent after consumer spending in November rose at the briskest rate in three years.
indiatimes.com
The rest of the world would be unable to avoid the pile-up if America does fly off the so-called fiscal cliff.
That is why, even in a holiday-shortened week, eyes will be peeled for signs that Democratic President Barack Obama and his divided Republican opponents can bury the hatchet.
The White House on Friday tried to rescue the stalled talks, but there was little headway to resolve what Alan Blinder, an economics professor at Princeton University, called the biggest near-term risk facing the global economy.
Seen from abroad, US policymakers were looking "clownish", the former vice-chairman of the Federal Reserve said: "This will do us a tremendous amount of damage."
Until last Thursday, markets had assumed a compromise would be struck, averting the risk of a relapse into recession. The slow-motion car crash had been so well signaled that surely the drivers would swerve in time?
But after Republicans abandoned a fix proposed by House of Representatives Speaker John Boehner, businesses and households head into the year-end knowing the clarity they crave on tax and spending plans could be weeks away.
"The longer uncertainty persists, the greater the negative impact on the economy," Lewis Alexander, chief US economist at Nomura, told clients.
"It may take the imminent threat of a breach of the debt limit in February, or March at the latest, to force an agreement," he added, referring to the Congressional approval that the Treasury will need to extend its borrowing authority.
THE CRASH HEARD AROUND THE WORLD
By sapping consumer confidence, the political brinkmanship could already be enough to sap short-term US growth.
If America then does tumble over the cliff for more than a few days, triggering fiscal tightening that could reach 4 percent of GDP, the repercussions would be felt around the world via trade and financial links.
"If our economy goes into a recession, especially a serious recession, a deep recession, that's going to hit imports from the rest of the world.
And to the extent that it messes up financial markets, that has a contagion effect," said Martin Feldstein, an economics professor at Harvard University.
Like Blinder, he was speaking on a conference call organised by Foreign Affairs magazine. Indeed, the resulting turbulence in financial markets could end the period of relative calm enjoyed by the euro zone, said Christian Schulz, an economist at Berenberg Bank in London.
Failure to put the US budget on a more sustainable path could well crush hopes that the world's largest economy is finally shaking off the effects of the financial crisis and returning to a path of steadier if not spectacular growth.
Credit Suisse on Friday raised its forecast for fourth-quarter gross domestic product growth to an annualised pace of 1.8 percent from 1.1 percent after consumer spending in November rose at the briskest rate in three years.
indiatimes.com
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