Fitch Sees Risk of U.S. Recession on Fiscal Cliff Concern

The U.S. risks entering a recession that will hurt economic growth worldwide should policy makers fail to avoid the so-called fiscal cliff of automatic tax increases and spending cuts next year, Fitch Ratings said.

“We think that will tip the U.S. back into recession,” Fitch Managing Director Ed Parker said in an interview in Istanbul yesterday. “This should be a wholly avoidable, unnecessary recession.”

U.S. stocks have tumbled, sending the Standard & Poor’s 500 Index to its biggest two-day drop in a year, after U.S. President Barack Obama’s re-election, as concern deepened that lawmakers will be unable to reach a budget compromise to avoid more than $600 billion in spending cuts and tax increases. The Congressional Budget Office reiterated that a failure to strike a deal would lead to a recession in the first half of 2013.

Fitch, which rates the U.S. AAA, its highest investment grade status, on Nov. 7 warned that the U.S. may be downgraded next year unless lawmakers avoid automatic tax boosts and budget cuts and raise the debt ceiling, while Moody’s Investors Service said it will wait to see the economic impact should the nation experience a fiscal shock. S&P stripped the U.S. of its AAA credit rating on Aug. 5, 2011, after months of political wrangling over the debt ceiling.

“If the U.S. goes into recession, given it has such a big weight in the global economy, then that will knock quite a lot of global growth,” Fitch’s Parker said. “That will affect the growth of pretty much every country in the world.”

S&P 500 futures slipped 0.4 percent at 8:50 a.m. in New York, signaling the benchmark equity gauge may extend declines.

“I am not saying it will trigger downgrades of other countries but it will reduce global growth and obviously weaker global growth will make other things equally bad for countries’ public finances,” Parker said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE