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Global Investment Outlook • Eric Lascelles • Daniel E. Chornous, CFA • John Richards
today – is difficult from this
distance. There is at least one basic
truth: the debt ceiling eventually
has to be increased – but there is no
guarantee that such a course will be
easily achieved.
In fact, it is fairly likely that the U.S.
will suffer another debt downgrade
in the fall, either because of further
brinkmanship over the debt ceiling,
or because politicians opt to renege
on the budget cuts they agreed to as
part of the 2011 debt-ceiling debate.
Fortunately, U.S. yields are unlikely to
suffer even if a downgrade does occur –
the dollar’s status as the global reserve
currency is a powerful advantage for the
U.S. But all of this nonetheless
will result in quite an odious close to
the year.
The second matter is the arrival of an
unprecedented fiscal cliff at the end of
2012 (Exhibit 25). This is partially due
to the prior debt-ceiling debate that
shunted budget cuts from then until
now, and partially for unrelated reasons.
Regardless of their provenance, quite
a large number of fiscal-stimulus
programs are due to expire as the
clock strikes midnight on New Year’s
Eve. These include the Bush tax cuts,
payroll-tax cuts and unemploymentinsurance
extensions. Meanwhile, other
tax increases or spending cuts are
scheduled to take effect, such as the
promised Budget Control Act austerity
from last summer and a host of smaller
items.
Altogether, the U.S. economy could
shed about three percentage points of
economic growth if this is allowed to
happen. This yawning gap marks the
difference between solid growth and the
cusp of a recession.
EXHIBIT 25.
Bush tax cuts
Payroll tax cut
Budget control act
UI extension
Other
Source: RBC GAM, CBO
EXHIBIT 26.
GDP, Annualized % Change
U.S. Debt Ceiling and Fiscal Cliff Looms
FISCAL CLIFF
2012 2013
U.K. in Double-Dip Recession
Our view is that politicians will come
to their senses and ensure that some
portion of this fiscal drag is delayed.
But a substantial fiscal drag should
nonetheless apply to 2013, and this
consideration is a central pillar for
our below-consensus U.S. growth
forecast for next year. Of course, as the
political rhetoric becomes ever more
strident along party lines, predicting
legislators’ cross-party interactions
becomes increasingly difficult. It is
doubly challenging given the many
permutations that could emerge from
the elections this fall.
If nothing is done,
expiring fiscal policy
chops a huge 3% off
2013 GDP growth….
U.K. in the rough
Politicians
will hopefully
soften the
blow….
…or a 2013
recession
could loom
6
4
Recession #1
Recession #2
2
0
-2
-4
Near miss
-6
-8
-10
2007 2008 2009 2010 2011 2012
Source: Haver Analytics, RBC GAM
SAMPLE
The U.K. continues to struggle through
a small recession, its second in four
years (Exhibit 26). The economy should
shortly return to sluggish growth, but
anything more than that is improbable
given the headwinds blowing from
continental Europe, combined with a
dogged determination to rein in fiscal
excesses before markets force the issue.
This is a commendable objective and
is in stark contrast to the laissez-faire
U.S. approach. We forecast GDP growth
The global investment outlook RBC INVESTMENT Strategy coMMITTEE Summer 2012 I 21