2011 is set to be a year of austerity for the US as it follows the UK’s lead, according to Simon Laing, manager of the Newton American Fund.
Since the midterms earlier this month, the US has been in a state of political limbo, as the new Republican Congress waits until the New Year to be sworn in.
This is despite the need for important legislation to be passed in the meantime, including a decision on the extension of President Bush’s tax cuts and changes to unemployment benefits.
“While it seems likely that these bits of legislation will eventually be extended, there is a possibility that they won’t be passed by year-end. Either way, there will be much public and political debate, and a possible destabilisation of consumer confidence. However, with the US holiday season looming, retail inventories looking in good health, and expectations for festive period sales at a realistic level, we expect holiday spending to meet, if not exceed, expectations,” says Laing.
The past month has seen the US Federal Reserve announce a further USD600bn of quantitative easing to be pumped into the US economy by the end of June next year.
“The Fed chairman, Ben Bernanke, wrote in his Washington Post column that the central bank’s intention was for higher stock prices that, in turn, boost consumer wealth, which has to bode well for risk assets,” says Laing.
“That said, the latest QE barrage does little to hide the dire economic issues still facing the US. In particular, the housing market remains in the doldrums, while the unemployment rate is still uncomfortably high. Meanwhile, further stimulus is unlikely given the greater Republican voice in Washington, and next year looks set to be one dominated by austerity measures and fiscal deficit reduction – things both the bond markets and US voter are likely to demand.”
A draft deficit reduction programme is already in the offing, although bipartisan agreement is required and this may mean delays in implanting such plans.
“However, the US government has the advantage of being able to use the examples of the UK and Eurozone’s attempts to sustain growth amid fiscal tightening as a blue print for their own austerity plans.
“In such an environment, private investment and hiring growth looks set to be the focus of the US economic recovery, much as it is in the plans of the UK’s coalition government, with initiatives to boost private investment likely to go hand in hand with austerity measures.
“In a similar vein, we expect those government-backed sectors, such as defence, to suffer as a result of a slowdown in government spending. However, we expect to continue finding attractive investment opportunities, in particular in those companies that do business with countries in the developing world,” says Laing.