Credit rating agencies can continue to generously rate the United States AAA, and the country can continue to rely on dollar dominance to borrow money easily and at extremely low costs.
However, the prolonged European debt crisis can serve as a wake-up call to the United States, which is abusing its privileges. It could have made greater efforts to cut fiscal deficit. Expenditure-cutting measures will soon come into effect under the budget control act, and the Bush tax cuts that have been extended for two years are about to expire. Democrats and Republicans will certainly reach a compromise, and the looming "fiscal cliff" has offered the country an opportunity to achieve debt sustainability.
2013 will be a highly risky year for the world economy.
First, the European debt crisis will continue next year given the ineffective fiscal and monetary policy of the euro zone. Second, the "fiscal cliff," shorthand for a 560-billion-dollar mix of tax hikes and deep spending cuts, will likely push the United States back into recession in early 2013. The country is likely to achieve zero gross domestic product (GDP) growth next year. Furthermore, emerging market economies such as China are slowing down, which will affect trading partners that are dependent on exports to these emerging countries and lead to continued economic downturn.
Markets will be turbulent next year, and investors have good reason to be pessimistic about stock and bond markets as well as the real estate sector.
The author is an Economic Affairs Officer at the United Nations Conference on Trade and Development.
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