A combination of expiring tax breaks and inbound spending cuts taking place at the same time next year — known as a fiscal cliff — could throw the country into a recession yet investors aren't pricing such scenarios into their trading strategies, a Bank of America Merrill Lynch survey of fund managers shows.
At the end of this year, the Bush-era tax cuts and other tax breaks expire at the same time cuts to government spending agreed upon during the 2011 debt-ceiling resolution kick in.
The combination, if left unaddressed by Congress, could throw the country into recession in 2013, with the nonpartisan Congressional Budget Office forecasting economic contraction of 0.5 percent next year if lawmakers do nothing.
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Uncertainty alone surrounding the cliff will affect the economy, as businesses are putting off plans to expand and hire as long as they don't know what they will be paying in taxes next year.
Yet 72 percent of the Bank of America Merrill Lynch survey respondents believe investors aren't doing enough to prepare for the cliff itself or the volatility that will brew as the end of the year approaches, according to CNBC.
"The fiscal cliff impacts the economy both by creating uncertainty and by imposing austerity," Ethan Harris, Bank of America's North American economist said, CNBC added.
"If we go over the cliff for an extended period of time, a recession is likely."
Other experts agree that fears surrounding the fiscal cliff alone can damage recovery.
"There has not only been a fall in corporate confidence while consumer confidence has risen, but durable goods orders have reflected the weakness in CEO business confidence," Andrew Garthwaite, global equity strategist at Credit Suisse, said in a note, CNBC added.
"So ironically the fear of the fiscal cliff may be as damaging to growth as the actuality of fiscal policy."
Meanwhile, multilateral financial institutions such as the International Monetary Fund fear such uncertainty can hurt the global economy as a whole.
"Growth would stall in 2013 with the full materialization of the cliff and... would inflict large spillovers on major U.S. trading partners and also on commodity exporters," the International Monetary Fund said in its World Economic Outlook.
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