2013 began with last minute positive news to avert the US fiscal cliff. But this is only a stop gap. In the next few months, three key pieces of fiscal legislation will have to be agreed and voted on. The most important piece of legislation is to extend the US debt ceiling.
In the aftermath of the fiscal cliff negotiations businesses in the US are worried. A recent survey of small and independent enterprises suggests that tax policy is of a bigger concern to entrepreneurs than revenue growth.
However UK business is relatively insulated to the debt ceiling discussions in the US. What is more relevant to companies here are the developments in the Eurozone. The German economy, the powerhouse of the Eurozone, shrunk in the last quarter of 2012 which was a big swing from the positive growth recorded in the previous quarter. The contraction in the German economy could signal more disappointing Eurozone growth data to come.
One thing we’re also following is the bailout negotiations to resolve the debt crisis in Cyprus. This is proving to be the latest real-life test of the commitment of Eurozone policymakers to break the vicious cycle between bank and the sovereign. For Cyprus, the policy dilemma Europe faces is to either lend directly to the sovereign which could put it under considerable stress or lend directly to the banking system, which will open up Pandora’s Box for the existing procedures already in place for the Spanish and Irish banking systems.