20.02.2013

Short analysis Monika Rosen, Chief Analyst at Bank Austria Private Banking:
Cuts across the board? US budget cuts almost inevitable

  • Automatic budget cuts could grip the USA on 1 March
  • These sweeping budgetary cuts would affect all departments, but be less dramatic than the fiscal cliff
  • Budgetary cuts would constrain US economic growth in 2013 by 0.5 percent, and in 2014 and 2015 by 0.6 and 0.7 percent respectively
  • Markets still very composed about skirmish
  • We uphold our neutral stance on US equities

In the USA, automatic budget cuts are set to enter into force on 1 March unless Congress manages to reach a suitable budget compromise before time runs out. But this seems unlikely from today's perspective. Since there has been a range of tax increases from the start of the year and this managed to avoid the fiscal cliff at the last minute, all signs now point towards a reduction in spending. President Obama has offered a compromise to Congress: further tax hikes coupled with a range of spending cuts. The Republicans are completely against this, they want to see savings and argue that the tax hikes at the start of the year are more than enough.

The general budgetary cuts would in principle affect all departments indiscriminately, with a slight emphasis on defence. The consequences of the cuts, however, are much less dramatic as the fiscal cliff would have been. If the cuts are implemented then US economic growth is expected to contract by 0.6 and 0.7 percentage points in 2014 and 2015. For this year the slowdown is likely to be less marked, amounting to 0.5 percentage points. So in 2013 the negative impact should be more moderate, and this is down to two reasons: on the one hand, the impacts on the 2013 calendar year will be less pronounced as they will not take effect until March at the earliest. On the other hand, a significant part of the spending cuts in defence were pushed through at the end of 2012, in anticipation of the automatic budget cuts.

Conclusion: We assume that these automatic cuts in budgetary spending will be implemented in the USA. In recent years, compromises were only reached in Washington if the economy was standing on the edge of a precipice (for example the increase in the debt ceiling in summer 2011 and the fiscal cliff at the turn of the year). This time round, however, the economic impacts are less dramatic. And following the de facto defeat with the fiscal cliff, the Republicans now need some success, also against their own rank and file. The markets are still very composed, partly because they are banking on a compromise and partly because there is less at stake when compared to the end of December. However, we should not lose sight of the fact that sometimes only a perceived reason or pretext is enough to bring about a change in sentiment on the market. Increases in recent months were substantial. A period of profit-taking was also triggered by trivial events. We uphold our neutral stance on US equities.

Enquiries: Monika Rosen
Chief Analyst at Bank Austria Private Banking
 Tel. +43 (0) 50505 - 40104
  E-Mail: monika.rosen@unicreditgroup.at

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