According to Standish, a combination of recent actions by the Fed and an expected compromise deficit reduction package would be enough to prevent a recession.
Standish further added that the Fed’s asset purchase program has eased financial conditions and supported the housing market. For bond investors, this could mean that there could be opportunities in US corporate credit markets.
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If no action is taken to avoid the fiscal cliff, tax hikes and spending cuts amounting to 4.8% of US gross domestic product (GDP) will go into effect on 1 January 2013, the report notes, adding that a compromise deficit reduction package could reduce this drag to 1.4% of GDP.
Thomas Higgins, global macro strategist for Standish, said: "While we don’t see much room for cooperation between the Democrats and the Republicans on addressing the fiscal cliff, we also doubt either party will want to be held responsible for engineering a US recession by allowing the entire $807 billion in deficit-cutting measures to take effect."
"Under our base case scenario, the US economy will suffer a fiscal drag of roughly 1.4% of GDP next year and US real GDP growth will decelerate from 2.1% in 2012 to 1.4% in 2013," Higgins added.
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