(November 9, 2012) – What does the Presidential election outcome mean for the United States economy’s ‘fiscal cliff’?
Pacific Investment Company Corporation (PIMCO) aims to answer that question in a newly published paper by the asset manager’s Libby Cantrill and Josh Thimons. Even though the election results are only just final, market participants are pondering this area of uncertainty, PIMCO believes. (The so-called cliff is the point when a wave of taxes that had been temporarily repealed to try and stimulate the global economy, along with an array of other measures, should come into force adding pressure to the US’ financial prosperity.)
“We wrote recently that our base case for a fiscal cliff resolution—regardless of the election outcome—was a short-term, ‘mini’ deal that largely kicked the can down the road on the majority of the key items,” the whitepaper says. That mini-deal, according to the authors, would reflect about 1.5% of GDP in fiscal contraction in 2013 (vs. nearly 5% without a deal).
“While this remains our base case, we can afford to have a more nuanced view now that the election outcome is known, including our opinion that there is now a greater likelihood of so-called tail events related to the fiscal cliff resolution, which will have implications for markets and for our positioning,” the authors write.
PIMCO’s prediction? A compromise on the Bush tax cuts for the upper income earners and sequestration and on the across-the-board spending cuts agreed to as part of the debt ceiling resolution in summer 2011. “In addition, we believe that coupled with a mini deal, there will likely be a commitment or (optimistically) a process established for broader structural reform in 2013,” the paper notes.
Another, less likely effect of the election on the US fiscal cliff, as outlined by PIMCO, is inaction. The paper explains: “Because without a meaningful shift in the composition in either chamber of Congress and the White House, the players who are negotiating the fiscal cliff deal are largely the same ones who have come close to driving our country to the brink in other, similar negotiations.”
PIMCO’s assertions about the status of the US fiscal cliff follow related findings from a monthly fund manager survey conducted by Bank of America Merrill Lynch. Almost three quarters of respondents to the survey said they did not believe that the fiscal cliff was substantially priced into global equities and macroeconomic data. Alice Leedale, market strategist at asset manager RWC, said: “As we enter Q4, the big elephant in the room (or a donkey if you are a Democrat) is the US fiscal cliff, but the market has so far been focusing elsewhere. The first October regional manufacturing surveys will be released this week, and continued weakness following September’s disappointments will suggest that the fiscal cliff is not being ignored in this sector of the economy, and is indeed weighing on business sentiment and investment spending.”