Schroders’ chief fears US fiscal cliff

The US fiscal cliff may lead to a US recession and will cause volatility in global stockmarkets, says Schroders’ head of global macro Bob Jolly.

The US fiscal cliff refers to a large predicted reduction in the budget deficit and a corresponding projected slowdown of the economy if specific laws are allowed to automatically expire or go into effect at the beginning of 2013.

Jolly says: “The US is writing cheques that it just cannot cash. So at some point it is going to have a fiscal challenge but we do not see structurally the US defaulting. Dealing with the fiscal cliff has the potential to take a big slug out of the economy, which will drive the US into recession.”

In terms of tackling the fiscal cliff through fiscal austerity, Jolly says it will take place after the election when it becomes obvious to everyone in the voting population that austerity is crucial.

He says: “Our central expectation is that it will be divided between senate and house. Dealing with the fiscal cliff is a real challenge because you go into “lame duck” and then you have a problem in getting politicians to agree anything. There is likely to be a fair amount of brinkmanship between the republics and the democrats.”

Jolly says over the next six to nine months there is a good chance of having a “fair amount of volatility before we get a resolution. It will take market pressure to move politicians forward”.

“Ultimately, we think the resolution will offer a degree of economic damage, but politicians will kick the can down the road. Then whoever is in power will put in a long-term structure to deal with the deficit,” he says.

Concerns over the impact of the US fiscal cliff are growing, the latest Bank of America Merrill Lynch fund manager survey also revealed.

The October survey found 72 per cent of respondents did not believe the fiscal cliff was “substantially priced into global equities and macroeconomic data”.

It is further identified as the number one tail risk by 42 per cent of respondents, increasing from 35 per cent in September.