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Depressing analysis from Nomura’s top US economist Lewis Alexander in the wake of last night John Boehner Plan B fail:Bottom line, it seems unlikely that any legislation to address the main fiscal cliff policies will be passed before the end of the year. We expect negotiations to continue into the new year. It may take the imminent threat of a breach of the debt limit in February, or March at the latest, to force an agreement.
The direct effects of higher taxes and spending cuts, which take effect in January, will probably not be felt immediately. But the longer those policies are in effect, the greater the impact on the economy. Our forecast for the first quarter – real GDP growth of 0.5 per cent in Q1 – anticipates some disruption from the contentious debate over fiscal policy. However, it also assumes that three quarters of the fiscal cliff polices are ultimately pushed off. The longer uncertainty persists, the greater the negative impact on the economy.