EFIC World Risk Developments November 2012 

 EFIC World Risk Developments November 2012 

EFIC media release - 21 November 2012

Risk of another US recession as uncertainty over fiscal tightening remains

The US economy risks re-entering a recession if more than US$600 billion of planned fiscal tightening measures take effect from next year, according to the latest issue of World Risk Developments.

The report notes that continued uncertainty over the future of US fiscal policy is likely to weigh on the US economy and global financial markets until the end of the year. Unless an agreement is reached, the  tightening measures will take effect from January 2013.

“Fiscal tightening of this magnitude would push the economy back into recession,” said EFIC senior economist Ben Ford.

“The Congressional Budget Office estimates that it would subtract 3 percentage points from growth in 2013. For an economy growing at only 2 per cent per annum, this would be quite a shock – hence  financial markets and business are worried.”

But Ford added that the most likely outcome is that “a patchwork agreement” on fiscal measures will be reached just in time.

“Both Republicans and Democrats are said to be working on how to extend, at least temporarily, most of the expiring personal tax cuts and to slow the implementation of some spending cuts,” he said.

“Though this would still result in a significant fiscal drag of about 1 per cent of GDP in 2013 based on most estimates, it would also give the President and the new Congress more time to negotiate a broader ‘grand bargain’ to help deal with the US’ medium-term fiscal challenges, such as rising entitlement spending.”  

The latest issue of World Risk Developments also notes that the Philippines could soon reach investment grade status, thanks to the Aquino government’s efforts to rein in the fiscal deficit, combined with the country’s strong balance of payments. 

“Further fiscal improvements and stable economic growth are likely to see the Philippines reach investment grade sometime in the next two years,” said EFIC senior economist Dougal Crawford.

“The bond market is already there, with yields on Philippine US-dollar bonds trading below investment grade bonds from Indonesia”.

However, Crawford warns that this change “does not mean that all the economy’s long-standing weaknesses have been tackled.” 

“In particular, the domestic economy is still growing too slowly to provide jobs for the rapidly expanding population,” he said.

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