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John Boehner after his meeting with Barack Obama
John Boehner after his meeting with Barack Obama. Photograph: Joshua Roberts/Reuters
John Boehner after his meeting with Barack Obama. Photograph: Joshua Roberts/Reuters

Why the world economy needs America to avoid the fiscal cliff

This article is more than 11 years old
A US recession in 2013 would lead to much slower growth in China, intensify the downturns in Japan and the eurozone, and make a triple dip in Britain a nailed-on certainty

Just as during the Cuban Missile crisis of 50 years ago, the world is watching anxiously as the politicians in Washington try to prevent the US economy from plunging off the fiscal cliff. The stakes could never be as high as they were when Khrushchev and Kennedy were on the hot line in October 1962, but there would be serious consequences were the talks between President Obama and John Boehner, the leader of the Republicans in the House of Representatives to end in failure.

George Osborne is just one of the finance ministers keen to see the impasse ended. The latest news from the UK economy was disappointing, even if there were one or two bright spots. Growth in the third quarter was less strong than originally believed at 0.9% while a year in which the economy has stagnated has taken its toll of the public finances. Once all the special factors were stripped out, the deficit was 10% higher in the first eight months of the 2012-13 financial year than in the same months of 2011-12.

What the hard data and the survey evidence show is that it will be touch and go whether Britain has a triple-dip recession this winter. At the moment, the odds are slightly against a further two consecutive quarters of declining GDP but that would go out of the window if more than $600bn (£370bn) of tax increases and spending cuts are triggered in the US on 1 January .

Officials in Washington have calculated that the budget tightening involved would wipe out all the expected growth in the US economy next year and result in a 0.5% contraction instead.

Despite the rapid growth of China, the US is still the world's biggest economy and accounts for one fifth of global output. A recession there in 2013 would lead to much slower growth in China, intensify the downturns in Japan and the eurozone, and make a triple dip in Britain a nailed-on certainty.

Both sides in the Washington talks know the risks. Markets have started to fray at the edges in recent days as hopes have been dashed that a deal would be signed before Christmas. The expectation is that just as in 1962 mutual assured destruction will be avoided, and it probably will be. But time is getting short and damage – in the form of delayed investment decisions and the blow to consumer confidence – is already being caused. In its current state, it is damage the global economy could do without.

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