"Bungee Jump Scenario" Likely to Avoid Recession

NEW YORK and LONDON, November 15, 2012 — BNY Mellon Chief Economist Richard Hoey expects the fiscal cliff will be fixed in the first few days of 2013 if it is not fixed in the last few days of 2012, according to Hoey's most recent Economic Update. 

"We believe that if the tax hikes and spending cuts of the fiscal cliff do go into effect, the odds that they will be ameliorated within a few days are quite high," said Hoey.  "This is sometimes called the 'bungee jump scenario.'"  Hoey states that it may prove easier to finalize a fiscal cliff deal in the first few days of January 2013 than in the last few days of 2012, since members of the House of Representatives would then be voting for tax cuts rather than for tax increases on the top two brackets.

Hoey further states that if the U.S. goes over the fiscal cliff and does nothing about it for the 365 days of 2013, the calendar 2013 fiscal tightening of 5% of GDP would be very likely to generate a recession.

"Given that Washington politicians would be blamed for an avoidable recession if the fiscal cliff is not dealt with by early 2013," Hoey continued, "we expect the eventual success of negotiation to reduce the size of fiscal tightening in 2013." 

Other report findings include:

U.S FISCAL TIGHTENING IN 2013 -- Fiscal consolidation of 1% to 1.5% of GDP for 2013 will prove more likely than the fiscal tightening of 5% of GDP for 2013 which would occur if the entire fiscal cliff took place and was not modified for the entire year.

GLOBAL GROWTH RECESSION WILL PERSIST – Global growth recession is expected to persist in 2013, especially in the early part of the year.

LESS WORSE ECONOMY IN EUROPE – A "less worse" economy in Europe is expected in Europe in 2013, with a modest improvement from a full-scale recession in 2012 to flat economic activity in 2013.

See http://www.bnymellon.com/foresight/update-video.html for Hoey's complete November 2012 Economic Update. 

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