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US fiscal woes pose biggest risk to global economy
January 26, 2013
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WASHINGTON: Investors around the world say the fiscal woes of the US, highlighted by the ongoing fight over the debt limit, pose the biggest risk to the global economy this year, according to poll results. More than a third of the respondents in the Bloomberg Global Poll — 36 per cent — said the troubles in Washington addressing the huge US budget deficit were their biggest concern. That topped the European debt crisis at 29 per cent and the slowing of China’s economy at 15 per cent.

Although the poll found the divisive political atmosphere was chilling investment in the US, the nation still easily ranked first as the best place to invest this year.

The US was chosen by 38 percent of the 921 randomly selected investors, who could chose one or two markets as providing the best opportunities, with China at 31 percent and the European Union at 22 percent.

The likely reason: A majority of investors — 53 per cent — said the US economy was improving, compared with 32 percent for China and 16 per cent for the eurozone.

Overall, 35 percent said the global economy was improving.

The White House and Congress avoided the potentially calamitous “fiscal cliff” with a deal enacted Jan. 2 to extend most of the George W. Bush-era tax cuts. But they put off decisions about large automatic government spending cuts until the end of February.

With a potential default looming if the $16.4 trillion limit is not raised in coming weeks, the House of Representatives on Wednesday passed a Republican plan to suspend the debt limit through mid-May. The bill is expected to meet with approval from the Senate and White House.

Despite the threat of another contentious battle over the debt limit, which would be a repeat of 2011’s brinkmanship, 92 percent of global investors in the Bloomberg Poll said the US was unlikely to default on its sovereign debt.

But a majority sided with the general Republican argument on the debt limit, with 56 percent saying Congress was right to require spending cuts equal to any increase in the debt ceiling.

Just 40 per cent sided with the Obama administration view that the full faith and credit of the US should be protected at any cost and the debt ceiling should be raised with no preconditions.

The repeated political battles in Washington have had an impact on investors: 8 percent said the confrontations were leading them to pull out of the US market, with another 39 percent saying they are holding back some investments.

But 45 percent said the divisiveness was not affecting their investment decisions.

Investors were somewhat optimistic that Obama and Congress would be able to work together to address the US financial problems.

A majority — 56 per cent — expected a deal to make spending cuts in entitlement programs, but most of those investors predicted only modest reductions.

And 65 percent of investors said they expected tax reform legislation to be enacted in 2013, though most of those also expected only modest changes.

Claims for jobless benefits in the US unexpectedly dropped last week to a five-year low, highlighting the challenges in adjusting the data for swings at the start of a year.

Applications for unemployment insurance payments decreased by 5,000 to 330,000 in the week ended Jan. 19, the fewest since the same week in 2008, the Labour Department reported on Thursday in Washington. Economists forecast 355,000 claims, according to the median estimate in a Bloomberg survey.

“If you look at the behavior of claims over the last several weeks, they’ve been almost identical to those in 2008 when we had a similar calendar configuration,” Brian Jones, senior US economist at Societe Generale in New York, who projected a drop to 328,000, said before the report.

A pickup in consumer spending last month may be helping employers look beyond the rancor in Washington over attempts to cut federal spending and trim the national debt.

Nonetheless, an increase in the payroll tax at the start of the year has shaken household confidence, raising the risk that sales may cool.

“The economy is in fact improving,” Jones said before the report. “The trend in the data is that claims are coming down.”

Estimates for first-time claims ranged from 310,000 to 380,000 in the Bloomberg survey of 49 economists. The prior week’s figures were unrevised at 335,000.

The swings in claims may reflect challenges adjusting the data during the holiday period and at the start of quarters.

This year’s changes are following patterns seen in prior years, a Labour Department spokesman said as the data were released to the press.

In 2008, claims dropped for consecutive weeks in early January and then rebounded at the end of the month.

The number of applications was estimated for California, Virginia and Hawaii because of the holiday-shortened week, the Labour Department spokesman also said.

The number of people who continue to collect jobless benefits fell by 71,000 to 3.16 million in the week ended Jan. 12, the fewest since July 2008. The continuing claims figure does not include workers receiving extended benefits from the federal government.

MCT

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