Global economic leaders now fret about the task ahead for Washington: The looming "fiscal cliff"
Experts warn the automatic taxes and cuts could send the U.S. economy into a recession
Sir Martin Sorrell, CEO of WPP: "That's the real gorilla in the room"
China worries that a U.S. recession would drag its slowing economy further down
As supporters of U.S. President Barack Obama celebrate his victory, business and monetary leaders around the world sent along their congratulations.
But global economic leaders now fret about the task ahead for Washington: The looming “fiscal cliff.”
“We have the pleasure of extending our warm congratulations to President Obama on his re-election as President of the United States of America,” wrote José Manuel Barroso, president of the European Commission, and Herman Van Rompuy, president of the European Council, in a joint statement.
“The United States is a key strategic partner of the European Union and we look forward to continuing the close cooperation established with President Obama over these last four years, to further strengthening our bilateral ties and to jointly addressing global challenges, including in the fields of security and economy.”
Some business leaders were dismayed by Obama’s re-election. Donald Trump’s tweets went from resignation (“Well, back to the drawing board”) to denial (“We can’t let this happen. We should march on Washington and stop this travesty. Our nation is totally divided!”) to anger (“This election is a total sham and a travesty. We are not a democracy!”)
Outside of partisan concerns, the financial world is now waiting to see what the United States does to tackle the fiscal cliff, which experts warn could send its economy into a recession if not addressed by December 31 – triggering automatic spending cuts and tax increase worth $7 trillion over a decade.
The fiscal cliff is “the real gorilla in the room,” Sir Martin Sorrell, CEO of WPP Group, told CNN.
“It’s a sort of game of Congressional chicken taking place, just as we saw in the summer of 2011,” he said, referring to the brinksmanship on battling the U.S. budget, a fight which saw the nation lose its AAA credit rating from Standard & Poors’.
“We’ll have to see what happens in terms of how they deal with this crisis and deal with these issues,” Sorrell said.
International Monetary Fund head Christine Lagarde has previously spoken out about the fiscal cliff. At last month’s IMF annual meeting, she said the risk is “not factored in yet. So it could well be that people assume that there will be a muddling through scenario. But that muddling through is not satisfactory.
She added, “there is still that big uncertainly as to how it’s going to be resolved in the short term, but also how will be resolved in the medium term. What is the strategy of the United States when it comes to its debt, when it comes to its deficit. The world doesn’t know and the world wants to know.”
With the slowdown in the eurozone, China has much to worry about the U.S. falling off its fiscal cliff and dragging the Chinese economy down with it. This is a far more worrisome concern than the U.S. campaign rhetoric against China, analysts say, including Mitt Romney’s pledge to label China a currency manipulator on his first day in office if he had won.
Those concerns were apparent earlier this week when G20 finance minister met in Mexico City. In an interview with Chinese media, Chinese Vice Finance Minister Zhu Guangyao told reporters that the U.S. falling into recession was “bound to drag on the global economy, making it more unstable and a global recovery more difficult,” China’s state-run media Xinhua reported.
“I think people here now hope Obama can become more constructive in his relationship with China,” said Shaun Rein, managing director of China Market Research Group in Shanghai. “There’s a feeling he’s been pandering to the electorate talking about China as a currency manipulator and the harsh trade rhetoric.
“The (Chinese) senior leaders we’ve spoken to are pretty disappointed by Obama in general. There was a lot of happiness with Obama when he was elected, but people now feel he hasn’t focused on China in the right way,” said Rein, as Obama has vowed to beef up the U.S. military presence in Asia and waded into territorial disputes in the East and South China Sea.
Regardless the leader, China needs the U.S. economy to prosper in order to keep export flowing and U.S. investment in China high – which are important ingredients Beijing needs as it attempts to boost Chinese wages and beef domestic spending, he said.
“There’s a fear here he really doesn’t know how to push the economy forward,” Rein said.