December 16, 2012 6:43 pm

Economic Outlook: US fiscal cliff looms

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Markets will be on tenterhooks in the last full trading week before the new year as any resolution of the US fiscal cliff of tax increases and spending cuts is looking increasingly likely to come in the 11th hour.

This week’s regional business activity surveys and confidence indicators in the US are therefore expected to reflect the growing unease felt by businesses, employees and consumers over the looming cliff.

The regional manufacturing surveys – the Empire State on Monday and the Philly Fed on Thursday – will be given unusually close scrutiny, particularly the employment elements, after the Federal Reserve last week said it would keep interest rates close to zero until the unemployment rate falls below 6.5 per cent.

Activity in both regions was hit by Hurricane Sandy last month and pushed the Empire State index to -5.2 and the Philadelphia index to -10.7. Both are expected to have bounced as the rebuilding began, but both are expected to remain below the break-even point. Forecasts indicate the New York region’s index has climbed back to zero, while the Philadelphia region’s is seen at -2.

In the UK, data on Tuesday are expected to show that inflation is starting to look a little sticky as higher food prices and energy tariffs keep pressure on consumer prices in November.

After hitting a 34-month low of 2.2 per cent in September, CPI unexpectedly jumped to 2.7 per cent in October – almost half of this rise due to a near trebling in maximum university tuition fees. Annual CPI is expected to rise to 2.8 per cent in November, which might start to be of concern for the Bank of England next year.

Minutes of the Bank’s December 6 Monetary Policy Committee meeting are published on Wednesday and are expected to show little change in how the various members voted: all are likely to have agreed to no change to the 0.5 per cent overnight rate, with only David Miles expected to have voted for further quantitative easing.

“With the economy seemingly struggling in the fourth quarter, and recovery prospects fragile, we think the Bank of England will decide to give the economy a further helping hand with £50bn of QE in the first quarter of 2013,” says Howard Archer at IHS Global Insight.

The final reading of third-quarter growth on Friday is expected to confirm UK GDP rose 1 per cent on the quarter, but analysts are already looking ahead to what they expect to be a disappointing fourth quarter reading as the boost given by the Olympics unwinds.

Most still expect the Bank of Japan to expand its asset purchase scheme by a further Y10tn at its policy meeting on Thursday. Recent weakness in the yen has provided a boost for Japan’s exporters, but the currency’s downturn has been dependent on expectations of a more dovish BoJ following the weekend elections.

“With monetary policy in the spotlight in the run-up to the elections, political pressure on the BoJ is high,” says Madhur Jha at HSBC.

Sweden’s Riksbank is expected to deliver a quarter point rate cut to 1 per cent on Tuesday as inflation remains subdued and unemployment creeps higher.

It is a quieter week in the eurozone, with no more summits scheduled for the year and just a handful of sentiment readings, most notably German Ifo business confidence on Wednesday. An increase in confidence is expected in December, with the main index climbing to 102.1 from 101.4 in November.

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