The prospects of the US economy will have a significant impact on the global recovery and the outlook for 2013. The US is facing the prospect of a fiscal cliff which comes into force on 1 January 2013 in the form of $600billion automatic tax increases and spending cuts in order to tackle the nation’s huge deficit. Congress will need to agree a new deal to mitigate the effect of these automatic taxes and cuts. Critics are concerned that the extent of the automatic measures imposed will send the US economy into a deep recession as the fragile economy is unlikely to cope.
This is not the first time the US has been faced with a fiscal cliff. Congress successfully managed to agree a compromise position last time the economy was faced with this position and we expect that a similar position will arise this year whereby the politicians will successfully manage to kick the can down the road for another year or so.
Whilst an outright US recession is likely to be avoided, we can expect increased taxes and spending cuts in the US in 2013 as part of the deficit reduction plan although not to the extent of the automatic cuts implicit under the current arrangement. The US healthcare and defence sectors are likely to suffer and so contractors and small businesses would be advised to reduce their exposure to these areas where possible.