The fiscal cliff ‘will become a slope’

US congressThe fiscal cliff of tax rises and spending cuts that threatens recession in the United States will be softened by compromises to extend or delay fiscal tightening, say fund managers.

But the effect on equities and other risk assets could still be damaging, while uncertainty could cause another downgrade of the US credit rating.

“It is doubtful that the fiscal cliff will fully come to pass as a number of the provisions within the cliff enjoy bipartisan support for extension or renewal,” says the Templeton Global Equity Group.

Compromises are likely, says the group, such as a move to increase effective tax rates by closing tax loopholes without raising statutory rates for the rich to levels seen before the administration of George Bush between 2001 and 2009.

Meanwhile Bob Jolly, head of global macro at Schroders, says he believes the actions of the Federal Reserve will continue to support the economy.

“The US fiscal cliff will become a fiscal slope,” he says. “We are about to enter an extended period of fiscal austerity in the US and monetary policy will remain an accommodative offset.”

Many analysts say the fiscal cliff has already damaged the economy by diminishing companies' willingness to invest capital and hire staff. This uncertainty has attracted the attention of ratings agencies.

“Compromise on fiscal cliff likely to see US recession avoided but will probably not be enough to stave off further downgrades,” says Robeco, in one of its five investment themes for 2013.

After Standard & Poor's took the US credit rating down a notch from AAA in August 2011, the three major US stock indices fell between 5% and 7% in a day.

The combination of scheduled tax rises and spending cuts that is called the fiscal cliff would reduce the US deficit by up to 5% of its GDP in 2013, but the Congressional Budget Office has warned it would drive the economy back into recession and push unemployment up to 9.1%.

©2012 funds europe