U.S. debt gridlock is the biggest risk facing the global economy even after the U.S. avoided the so-called fiscal cliff when Congress reached an agreement on the budget in early January.
The CHART OF THE DAY shows the potential drag on global output from a deepening of the euro-region debt crisis, a resurgent U.S. fiscal cliff and slowing growth in China, according to data compiled by the United Nations.
The data were collected before President Barack Obama signed a law averting most of the $600 billion in tax increases and federal spending cuts. Still, the UN report assumed the U.S. would extend tax relief, Europe would move toward ending its crisis and China would avoid a “hard landing,” said Pingfan Hong, chief of global economic monitoring for the UN’s Department of Economic and Social Affairs.
“The fiscal cliff contained two parts: the extension of the expiration of a number of tax-relief measures, and that part has been resolved, or 99 percent of it has been resolved,” Hong said by phone from Washington. “But the second major component is the automatic cut of government spending and that risk remains, that is, the baseline forecast remains valid because we didn’t assume a full-scale cliff in the baseline.”
The longer-term question of reducing the federal debt remains unanswered. The U.S. House approved legislation on Jan. 23 to suspend the limit on federal borrowing until mid-May. The measure now goes to the Senate. Congress faces a March deadline for $1.2 trillion of automatic spending cuts.
While the International Monetary Fund projects 3.5 percent growth in the world economy this year, its managing director, Christine Lagarde, called the recovery fragile and timid on Jan. 26 because the euro region remains prone to a political crisis and slow decision-making.