The market has known about this issue for many months, so in theory it shouldn’t have come as surprise.
The reality is though, that with the hard bargaining put on hold during the pre- election period, it is only now that the size of gap between the two political parties has become clear.
In contrast to the UK, checks and balances built into the political system mean that the US is no stranger to divided government, where the President faces a hostile Congress.
Normally this is not a major problem and it avoids a situation of elective dictatorship, although on this occasion, with the two sides of the aisle so far apart and with such a short time to find a solution, the risk that the US economy goes over the fiscal cliff and back into recession is very real.
In recent weeks, trends in US economic data have been improving, with better signs from the labour market and clear evidence that the housing market is showing a strong upswing.
Assuming a compromise solution on the fiscal cliff which doesn’t place an undue burden on the economy next year, we think that economic growth will remain close to the 2% average we have seen this year.
While this would be a much better outcome than renewed recession, it is still a very disappointing rate of growth for an economy in its fourth year of recovery.
