Bruce Kasman, chief economist & MD - global research, JPMorgan Chase explains to CNBC-TV18 that growth in the US will be below 2 percent and he hopes that ECB initiative will calm the nerves in Europe and prevent any worsening of the crisis.
Below is an edited transcript of the analysis on CNBC-TV18.
Q: There has been quite a bit of pullback in global markets on worries of the fiscal cliff. How do you think the cookie will crumble in the next few weeks on that front?
A: We're hopeful, although by no means confident, that there will be an agreement between the President and the Congress to avoid the worst of the fiscal cliff. But I would emphasise that even under this circumstance, there is some agreement the US is going to be, we believe, at least slammed by a pretty substantial fiscal drag.
We don't think the payroll tax holiday will be extended and there is tightening coming through the system that goes beyond anything being negotiated with the fiscal cliff. So we think the US will avoid the cliff, but there will be a fairly substantial drag on growth early next year.
Q: How do you read the negative market reaction of the last couple of days?
A: I do think the concerns that were expressed in the markets on Thursday won't be continued if we get some agreement. But the issue right now is getting Washington to make a deal to avoid the worst-case scenario where we have a huge fiscal drag in early 2013.
Q: People have also started talking about the possibility of a ratings downgrade in 2013. Is that fear also looming over the market?
A: Well, I think there is a two-edged sword there. Remember that the risk here is that there might be too much fiscal tightening though from the view point of the rating agencies, it is a step in the right direction. I think the case for a rating-agency downgrade has to do with the dysfunction in Washington combined with the debt-ceiling crisis which is going to potentially hit later in Q1.
I think if things went bad in Washington on the fiscal cliff and came out badly with regard to how we deal with the debt-ceiling limit, I think there is a chance of a rating downgrade. But we are not building that into our forecast right now.
Q: We always focus more on the equity markets, but how have the last couple of days been in the bond market and what signals are you picking up?
A: I think what we are seeing in the markets generally, and in the US bond market specifically, is rising risk uncertainty as the economy moves towards the fiscal cliff. So there is richness in the US treasury market that reflects a continued sense of uncertainty.
If we realise the fiscal cliff negotiations with some agreement that doesn't force us over it, we do think the treasury market will sell-off. But right now as we are seeing in equity and other markets globally, is risk aversion in the picture as these uncertainties remain quite large.
Q: What kind of growth are you staring at for next year in the US?
A: We've estimated growth for the calendar year 2013 a little below 2 percent. It is an economy that inv our estimation that will get hit by the fiscal drag that is sizeable at the beginning of the year, even assuming a benign agreement regarding the cliff.
So growth on a quarterly basis will slow well below 2 percent at the beginning of the year. But we do think the economy has resilience with the private sector improving its underlying position and the global economy will pick up some steam.
We have the economy picking up growth momentum to an above 2.5%-pace as we go through the middle part of the year and to the end of 2013. So we do think there is going to be a hit in the early part of the year. As a result, the average for the year will be a bit below 2 percent.
Q: There have been some statements of concerns from Mario Draghi who says that one should start getting worried about Germany as well right now. Do you see any snowballing of bad news from Europe again?
A: We think there are reasons to be worried about a country like France as we look towards 2013, not least of which because we think the economy is moving into recession. We do think the dynamics in Germany are somewhat better, but I think the fiscal issues in Europe are widespread.
Our hope, though, is with the actions taken by ECB, with some more modest tightening taking place on the fiscal side across the region that there will start to be some growth emerging as we go through the first half of the next year.
That is a crucial development I think to calm fears about political stress around the region and also to help in terms of balancing fiscal austerity with growth in terms of achieving budget-outcomes.