The federal election eclipsed the relatively positive spate of economic data this week. The results, however, leave the state of U.S. politics in the same place they were prior to November 6th, with the same President and roughly the same cast of characters in Congress.
Now that the election is over, attention must turn to the “fiscal cliff.” Both sides of the aisle delivered their opening volleys this week, with Republicans stressing their opposition to any increases in tax rates and the Democrats their insistence that the “richest of the rich” pay more.
The path to compromise is not difficult to see, but will depend on both parties stepping back from their currently entrenched positions. With the U.S. economy showing increasing signs of momentum, the task for Washington is simple – avoid snuffing it out.
If and how the fiscal situation in the U.S. is addressed will have considerable implications for the Canadian economy. The impact, however, will depend on the mix of tax increases and spending cuts that are agreed upon by Congress.
Given the proposals set forth in the Obama campaign, we estimate that the hit to economic growth in Canada would be about 0.5-0.7 percentage points. This has been worked into our forecast for overall growth of just under 2% in 2013.