America falling off the fiscal cliff would be the most serious jolt to the global economy since the financial crisis, and could be felt on Australian markets as early as Monday morning, economists say.
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Inching towards the cliff
US Senate Majority Leader, Harry Reid, fears the country will head over the ‘fiscal cliff’, as the deadline for a deal looms.
Saul Eslake, Australian economist with Bank of America Merrill Lynch, said a worst-case scenario for Australia would be a shock to confidence, strengthening of the dollar, a fall in commodity prices, and weaker overall growth.
"The risks are now non-trivial," he said.
Hopes are fading for a political deal to avert a crisis, with the US House of Representatives due to meet on Sunday for an urgent session to try to reach a last-minute deal.
Should a deal fail, it would take some time for the real economic effects to play out globally and in Australia. But the impact on local financial markets could be immediate.
Mr Eslake said a deal now looked unlikely.
“It's hard to see now how they could reach an agreement that deals with the issues comprehensively,” he said.
“The best you could hope for in the remaining three days is some kind of deal that defers some of the measures entailed in the fiscal cliff, to be resolved in the early days of the new congress.”
Peter Dragicevich, a currency strategist at the Commonwealth Bank, said the US equities market and in turn Australian markets would come under pressure on Monday if a deal isn't made.
"The US dollar would be supported, which could see the Aussie dollar drift a little bit lower next week," he said.
"It takes two to three days to write the new legislation. So even if they came up with an agreement tonight, it would still be past the deadline."
Mr Eslake said any real economic impact on Australia could be delayed, as it was during the financial crisis, but the impact on financial markets could be very quick.
"Australian markets are the first to react, but tend to react cautiously and wait for a lead in larger markets, such as Japan and Hong Kong," he said.
“You wouldn't see a seizing up of global financial markets, but there would be some parallels to the financial crisis, in the way the financial crisis caused a recession in the US which spilled over to its trading partners."
“Although we don't do a lot of trade with the US, we do a lot of trade with US trading partners."
Treasurer Wayne Swan has joined the debate, taking to Twitter to laud Australia’s ‘‘resilient’’ economy and highlight the absence of such financial crises back home.
‘‘But even though unlike other countries we have low debt and very strong public finances, we’re not immune from global developments,’’ Mr Swan tweeted.
‘‘The impact of America’s fiscal cliff saga combined with Europe’s deep problems is having a real impact on the entire global economy.
‘‘Of course, we’re seeing the impact first-hand in Australia with the huge whack we’ve copped to our revenue base.’’
Compounding the crisis
While most analysts are predicting the local effects of a crisis to be downward pressure on Australian equities markets and a fall in the Australian dollar, Mr Eslake said there was a chance the dollar could rise, having more of a negative effect on the economy.
“Instead of the dollar going down and providing a cushion for the economy, as it often does, the dollar could rise and thus compound the effects of a crisis," he said.
Cliff talks have continued to dominate market sentiment today, but there is still uncertainty over the effect on local markets, said IG Markets market strategist Stan Shamu.
"No-one really knows what's going on to be honest, everyone is just responding or reacting to these headlines for now," he said.
Other analysts said the effects of the fiscal cliff debate could continue into the new year.
"That is going to be an influential factor for how we are going to start 2013," said Bruce McLeary of Burrell & Co in Brisbane.
"If an agreement doesn't go through there could be some weakness," he said.
The Australian dollar in particular seems very susceptible to the flurry of talk about whether or not a deal will be reached. Bank of New Zealand currency strategist Mike Jones says the dollar has had a rollercoaster ride of late on various bits of good and bad news but that it will head lower against the US dollar as the appetite for risk is reduced the closer America gets to the cliff.
"Sentiment towards the fiscal cliff is causing a lot of volatility in financial markets and the Aussie dollar at present and I guess we've seen sentiment flick from optimism to pessimism in a very rapid short space of time."