Fiscal cliff fudge to wipe up to '1.5%' off US growth

The US 'fiscal cliff' will only wipe off up to 1.5% of economic growth, rather than the full 4% being forecast says Invesco Perpetual chief economist John Greenwood.

Greenwood said the automatic tax increases and spending cuts set to come in at the start of next year amount to $615 billion or nearly 4% of GDP, which would be a ‘serious hit to growth’ in 2013.

However, Greenwood said US president Barack Obama and the Republican opposition have had constructive discussions and that they will likely come to an agreement which will mitigate the economic impact of the fiscal cliff.

‘I think they will reach agreement but not on the full extent of it – so I see a fiscal cliff reduced to 1-1.5% of GDP,’ said Greenwood. ‘There are good prospects of an agreement but still some tightening of fiscal policy going forward.’

He said Obama’s re-election will not have much of an impact in monetary policy terms, as Ben Bernanke will continue at the helm of the Fed, whereas Romney had proposed to depose him.

‘That won’t happen, Bernanke will continue until 2014,’ said Greenwood. ‘The Fed is set on quantitative easing for the foreseeable future.

‘On the Fiscal side… under Obama we will continue to have budget deficits for the foreseeable future and are not going to have drastic austerity any time soon.’

Invesco’s chief investment officer Nick Mustoe added that Obama’s re-election is pretty neutral overall. ‘The key thing and the broader issue is what’s happening within the US economy, so it’s not just fiscal,’ said Mustoe.

‘There’s an obvious improvement in the housing market and a real bonanza from oil and gas. We should keep a balanced picture of what’s driving corporate earnings at the moment.’