Canada's top trade economist: Exporters need not fear US 'fiscal cliff'

THERE's less to fear for exporters in the coming January "fiscal cliff" because the US economy is stronger than it looks and fear itself will help avoid a congressional impasse on new taxes and spending cuts that threatens recession, according to the Export Development Canada chief economist Peter Hall.

"It's coming, and it's big. The US economy is careening toward the so-called fiscal cliff at a frightening pace," he said, taking a jocular tone in his weekly commentary. "Will legislators seal a deal that allays these fears, or will political sclerosis drive America - and the world - to the precipice?"

The "bottom line", he said, is that "fear itself is the very catalyst that will keep legislators - none of whom wants their name on the US or global economy's epitaph - at the table hammering out a workable and practical deal".

Under current US law, the "fiscal cliff" refers to previously delayed spending reductions that start early next year. Together with tax cuts that are set to expire on December 31, the spending resets would slap the US with a fiscal tightening equivalent to a massive 5.1 per cent of GDP - enough to plunge the American economy into a second severe recession in a matter of weeks, he said.

But look on the bright side, said Mr Hall: "Consumers - 70 per cent of the US economy - are spending at a rapid clip while simultaneously mending their personal finances. Housing markets have turned the corner - residential construction is up 35 per cent, and yet has a long way to go before it hits normal levels. Even shattered US consumer confidence seems to be on the mend. At the same time, corporate America is in great shape: profits are near an all-time high, and businesses are sitting on a US$5.7 trillion mountain of cash and near-cash. Is the present whiff of recovery incentive for action?"

Mr Hall said frantic deal-making have commenced and is likely to intensify through till year's end. "These types of debates, though rancorous, are an historic feature of the US legislative process. Legislation needed to address most parts of the fiscal cliff will be far easier to pass than the highly charged medicare and financial bailout bills, as there is broad, bipartisan agreement on details," he said.

"Proper assessment of the likely impact of the fiscal cliff requires examination of each component of the forthcoming tax increases and spending cuts. This leads to a projected fiscal tightening amounting to just 1.4 per cent of GDP. CBO [Congressional Budget Office] output multipliers suggest a total economic impact worth 1.5 percentage points of US GDP." he said.

"Given economic momentum, this fiscal drag will hit an economy that's sporting underlying growth of 4.3 per cent. Netting out the 1.5 per cent fiscal impact still leaves a 2.8 per cent economy - true, not terribly exciting, but the underlying strength is. As the global economy's true powerhouse pulls it toward a real and lasting recovery, exporters should prepare to harness the new growth." Mr Hall said.