Partisan fight over "fiscal cliff" will harm U.S. economy

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Published November 12, 2012

| Reuters

Any partisan squabbling over the United States' looming budget crisis will harm its economy, according to a strong majority of economists polled by Reuters after Tuesday's presidential election.

While most said political leaders will avert by January 1 a "fiscal cliff" of automatic tax hikes and spending cuts worth $600 billion, respondents warned that confidence in the economy will be hit hard if talks descend into a major fight.

Democratic President Barack Obama's first item of business after winning the White House for a second term is to negotiate with a Republican majority in the House of Representatives to avoid a budget crunch before the start of next year.

Both Obama and senior Republicans -- defeated presidential candidate Mitt Romney and House of Representatives Speaker John Boehner -- have stated their desire to cooperate.

Forty-two out of 50 economists described as "high" the risk that fraught budget talks will harm investor and consumer confidence, while the remaining eight were "neutral". But some of the damage has already been done.

"The uncertainty around the cliff has and will continue to weigh on activity," said Michael Hanson, senior U.S. economist at Bank of America-Merrill Lynch.

"You've seen signs of that in capital goods spending - orders and shipments -- and it's very possible that we'll see hiring hit towards the end of the year, or early next year, depending on how the negotiations turn out."

There are already signs in corporate America that the budget uncertainty has sapped confidence in the economy, which is growing at a weak pace and is vulnerable to shocks.

AT&T , the second-biggest U.S. mobile service provider, said business customers are nervous about spending. Chief Executive Randall Stephenson said on Wednesday the uncertainty around the fiscal cliff is creating "a real throttle on this country's growth now".

Still, 46 out of 55 economists said politicians would strike a deal, but there was division on whether that would be stop-gap or permanent. Forecasts ranged from a three-month fix to a lasting solution.

"SIX OR SEVEN SHORT WEEKS"

Analysts were wary of a repeat of last year's budget talks, in which partisan stalemate over the federal debt ceiling threatened a government shutdown as it hit the limit.

That culminated in the loss of the United States' coveted "AAA" top-notch credit rating from Standard & Poor's, as politicians could only muster a series of temporary fixes.

The country could be thrown back into recession if politicians fail to prevent the tax hikes and budget cuts.

"A repeat of what we had last year would be of real concern," said Paul Ferley, assistant chief economist at RBC. "People sent these politicians to Washington to get things done, not engage in partisan bickering."

World stock markets are on course for their worst weekly performance since June, sagging largely thanks to the fiscal fears and the sovereign debt crisis in Europe.

Forecasters expected little improvement before the year is out. They see the S&P 500 index at 1,375 going into 2013 -- hardly changed from Thursday's close 1,377.51, as investors wait to see how budget talks progress.

"The hope is that in six or seven short weeks (politicians) can come to some sort of broad-based, bipartisan, long-run compromise. But that just seems like a very low probability outcome," said BoAML's Hanson.

There also remains the question over the composition of America's top economic policymakers over the next few months.

Treasury Secretary Tim Geithner is stepping down and there is little consensus over his replacement.

Eleven economists cited Jack Lew, Obama's White house chief of staff, as the most likely replacement, while nine pointed to Erskine Bowles, who was also chief of staff during Bill Clinton's presidency.

Of the 35 out of 55 economists who think Federal Reserve Chairman Ben Bernanke will step down on conclusion of his second term, 21 thought his vice-chair, Janet Yellen, would take over.

(Polling by Snehasish Das and Deepti Govind; Editing by Ross Finley/Jeremy Gaunt)

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