Valentijn van Nieuwenhuijzen (pictured), Head of Strategy at ING Investment Management on the outcome of the US presidential election…
The combination of an Obama win and divided Congress was our and the market’s base case expectation and is therefore not expected to have a major impact on market sentiment. It does take away some uncertainty (risk of a dead heat and legal challenges, future of Fed policy under Romney), but keeps the uncertainty over the fiscal cliff negotiations later this year very much alive.
Basically, the pre-election status quo is maintained because of which there remains a high risk of a stalemate between the Republicans and the Democrats in the US Congress. Our base case remains, however, that the fiscal cliff will be avoided because it is not in the interest of either party to induce a recession. We expect a compromise to be reached that results in a little over 1% of fiscal tightening in 2013.
Nevertheless, there is a non-negligible risk that the US will bungee jump off the cliff, i.e. if an agreement is not reached before January 1st there may be a temporary fiscal tightening of around 4% of GDP. This combined with the fact that the debt ceiling needs to be raised by early March at the latest should then be enough of an incentive to reach a compromise. It is hard to say how damaging this will be to economic growth. As soon as the private sector realises that the fiscal cliff is temporary and that the income effects will be retroactively repaired, its behaviour will probably not be permanently affected in a negative way, even though we may see some substantial volatility in the monthly data flow in Q1. However, for as long as all this remains uncertain, this uncertainty alone may induce businesses and consumers to be more cautious in their spending decisions.
One important source of uncertainty has now been removed, however. The probability that, in early 2014, Bernanke will be replaced by a new Chairman who is intent on tightening sooner than later has fallen substantially. The effectiveness of US monetary policy rests crucially on the Fed’s commitment to keep loosening until the real economy will have gained substantial traction. Hence, because of the Obama win, the credibility of this commitment remains very much intact.