The Fiscal Cliff was temporarily averted at the last minute. But what does all this dramatic gamesmanship mean for Canada? Not a whole lot…for the next three months. The bill was a final hours bid to stop tax hikes that might have pushed the U.S. economy back into recession. But our collective jump off the cliff wasn’t so much cancelled as postponed until March, when a slew of possibly more detrimental constraints in the form of automatic spending cuts are set to go into effect.
So what’s the takeaway? The short-term mini-boost to markets is a blip, as a terribly divided U.S. Congress faces off in increasingly partisan battles over spending, taxes and benefits. Canada’s economic fate rests considerably on the outcomes of these wranglings, as where the U.S. economy goes, so goeth our economy. A slow-up in the U.S. economy translates to less demand for Canadian exports.
The bill means the Bank of Canada did not have to take policy action for now but perhaps may have to do so down the road as the U.S. attempts to put their fiscal house in order in the coming months.
Finance Minister Jim Flaherty expressed relief that a deal had been reached, but cautions that though one major pothole has been avoided, the road ahead is still bumpy and uneven.
What’s a Canadian investor to do? Not a whole lot. It’s frustrating to feel as if our economic future is decided by a slightly dysfunctional system over which we have no sway, but such is our lot in life. At the very least, we can be glad world markets have been given a stay of a few months.