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The view beyond the ‘cliff’: Blue skies Add to ...

One of the big concerns about the so-called “fiscal cliff” is that even if Washington agrees on a budget before the end of the year, averting automatic tax increases and spending cuts, taxes are still likely to go up and spending is likely to go down. But there could be some good news here.

BCA Research has taken a sunny view, arguing that economic growth should rebound in 2013 even if the economy takes a step back early in the year. After all, a budget deal that extends middle-class tax cuts and avoids the most dramatic spending cuts will nonetheless slow U.S. growth to about 1 per cent in the first quarter of next year. And a resolution to the other parts of the “fiscal cliff” will likely set up the rest of the year for stronger growth.

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“In particular, the growth picture in 2013 is likely to benefit from the re-acceleration in business investment, which appears to have been adversely affected by recent fiscal uncertainty,” BCA Research said.

Improvements in the housing market, already underway throughout most of 2012, along with better household finances should also help.

This sort of optimistic thinking on the U.S. budget seems to be in short supply these days. Worries about the “fiscal cliff” have been hanging over the stock market for some time, but the concern went mainstream after the U.S. Presidential election, when it became clear that more political gridlock in Washington diminished the chances of a budget agreement before the end of the year.

But as we noted before in this space, automatic tax increases and spending cuts would arrive relatively slowly if there is no agreement – so there actually is no “cliff” at the start of next year. Indeed, it has been referred to as a “fiscal slope.”

The CBOE Volatility index, a fear gauge that tends to rise with investor worries, continues to drift along at low levels. On Wednesday, it sat at about 17 – up about 13 per cent since the end of November, but below the threshold of 20, signalling relative calm.

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