A warning from the International Monetary Fund that the US lacks a long-term strategy for dealing with its budget problems dampened the euphoric mood on global stock markets on Thursday.
Share prices paused for breath after their sharp rises as the Washington-based fund made it clear that it considered the 11th-hour deal to prevent the world's biggest economy from plunging over the fiscal cliff little more than a short-term fix.
The Dow Jones industrial average was up by four points at noon in New York after gaining more than 300 points in the previous session. London's FTSE 100 index consolidated above the 6,000 level, rising 20 points to close at 6047.34, a fresh 17-month high.
The rise in London came despite a survey showing British construction output contracted at its fastest rate in six months in December, driven by a steep reduction in house building.
Bond prices continued to fall after the deal between Democrats and Republicans in Congress to make the tax cuts announced by George Bush permanent and to postpone discussions on spending cuts and raising the US debt ceiling for two months. The interest rate (yield) on US 10-year bonds traded at up to 1.87%, the highest since September, while 10-year gilt yields in the UK edged above 2%.
The IMF, which feared that the US could drag the global economy back into recession without a budget deal, said: "We welcome the action by the US Congress to avoid sudden tax increases and spending cuts, including through an extension of unemployment benefits during 2013. In the absence of congressional action the economic recovery would have been derailed."
The IMF mirrored the view of the credit rating agency Standard & Poor's and many financial analysts, however, in stressing that the accord, reached late on New Year's Eve, was merely a stopgap. "More remains to be done to put US public finances back on a sustainable path without harming the still fragile recovery," the IMF said.
"Specifically, a comprehensive plan that ensures both higher revenues and containment of entitlement spending over the medium term should be approved as soon as possible. In addition, it is crucial to raise the debt ceiling expeditiously and remove remaining uncertainties about the spending sequester and expiring appropriation bills."
The sequester (steep federal spending cuts) was put off for two months and a number of appropriation bills, which authorise government purchasing, are due to expire.
Ian Kernohan, economist at RLAM, said: "So far so good, although there is much unfinished business, in the shape of spending cuts and debt ceiling issues, not to mention the much bigger question about how a relatively low-tax economy like the US can meet its long-term spending commitments in the face of an ageing population. Given the polarised nature of US politics at the moment, trying to sort all this out will be an uphill task."
S&P, which stripped the US of its AAA rating in 2011, said: "While Congressional compromise designed to avoid the 'fiscal cliff' may support the still-fragile US economic rebound, the compromise doesn't affect our view of the country's credit outlook, given that we believe yesterday's agreement does little to place the US's medium-term public finances on a more sustainable footing.
"In our view, the fiscal cliff has always been more of a slope – one that the country, in many ways, has been on for some time, with businesses curbing investments and financial markets advancing and retreating in reaction to news both good and bad. We maintain our forecast for US GDP growth of 2.2% this year, climbing to 2.7% in 2014."
Confused by the fiscal cliff? Can't quite get a grip on the trillions involved or the deal thrashed out in Washington on New Year's Eve?
A simple guide to the financial problems of the US circulating in the City reduces the vast number of zeroes involved to a simple household budget. This is it:
"Fiscal cliff put in a much better perspective:
'US tax revenue: $2,170,000,000,000
Federal budget: $3,820,000,000,000
New debt: $1,650,000,000,000
National debt: $14,271,000,000,000
Recent budget cuts: $38,500,000,000
Let's now remove eight zeros and pretend it is a household budget:
Annual family income: $21,700
Money the family spent: $38,200
New debt on the credit card: $16,500
Outstanding credit card balance: $142,710
Total household budget cuts so far: $38.50
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