Obama faces 'poisoned chalice'
Wednesday, 05 November 2008 11:02
Barack Obama will face a "poisoned chalice" of an economy heading to recession and a massive budget deficit as he takes office as the 44th president of the United States - although he should enjoy a honeymoon.
Joshua Raymond, market strategist at City Index, said the "Obama effect" had firmly gripped the markets this week and this should continue.
"People dancing in the streets in the US overnight sums up the good feeling generated from the overwhelming Obama victory, and this good feeling and positivity is easily transferred into the markets.
"When we are positive, we are more inclined to buy, and there is lots of positivity out there right now."
He added a honeymoon period was set to come
"We may enter a slight honeymoon period and how we act once this has passed will be extremely important for the markets. Only at this stage, will we be able to tell if we have truly reached the bottom," Mr Raymond concluded.
John Higgins at Capital Economics said: "The next president is going to inherit the poisoned chalice of an economy entering a deep and prolonged recession and a soaring budget deficit that will rapidly reach levels not seen in a generation.
"Of course, this might also be a golden opportunity for the victor to turn things around and make his mark on history, much as FDR did with the New Deal in the 1930s."
He predicts the US economy will contract 1.5 per cent in 2009 and flatline in 2010, while any recovery will be "lacklustre".
"This is not a short sharp shock that is going to last a few quarters. This is a global downturn and there will be no external demand to cushion the blow."
He added the slowing economy piles pressure on President Obama's re-election plans for 2012.
"The enfeebled state of the financial system means that economic growth could remain below its potential rate throughout Obama's first four-year term, making getting re-elected to a second term that much harder."
Mr Higgins said Mr Obama was not likely to abandon election promises to tinker with the tax system but "even the best laid plans will have to put aside to stimulate the economy".
Paul Ashworth at Capital Economics said: "Our calculations suggest that over the next couple of years, US banks will lose an additional $400 billion, meaning that the Federal government will eventually be forced to stump up even more money to keep the banks afloat and prevent a collapse in lending.
"That bailout will push government debt even higher. The upshot is that the budget deficit is going to widen to levels not seen since the Second World War."
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