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The looming threat of board-based tax hikes and spending cuts in the United States which are scheduled to kick in at the end of the year -- dubbed the "fiscal cliff" by investors – could push the global economy into recession, according to ratings agency Fitch.
"While it is not our base case, the dramatic fiscal tightening implied by the fiscal cliff could tip the U.S. and possibly the global economy into recession," the agency said on Thursday. "At the very least it would be likely to halve the rate of global growth in 2013."
The ratings agency says the tax increases and spending cuts could knock off as much as $800 billion US, or 5 percent, from the country's GDP on annualized basis.
The agency is calling for the fiscal cuts to be pared back to 1.5 percent of GDP.
It also says the sharp pullback in growth for the U.S. economy will be exported to economies around the world.
"As domestic demand fell, U.S. imports would drop faster than exports, and the resulting improving trade balance would need to be matched by deterioration in trading partners' balances, causing growth to slow," the agency says.
Fitch says that while the global economy would still grow by 1.3 percent in the event that the fiscal cliff kicks in, that is half of the agency's forecast of 2.6 percent-growth if the event is avoided.
"The potential contagion effects from greater stress in the U.S. financial sector and asset markets could further amplify the negative effects on the global economy," the agency says.
Fitch says export-oriented countries such as China and Japan would be most affected by the tax hikes and spending cuts.
The so-called fiscal cliff was put in place in August of 2011 to solve the debt ceiling crisis. As a solution to raising the country's debt ceiling, lawmakers passed legislation that ensured across the board spending cuts and take hikes would kick in beginning in January 2013 if lawmakers failed to reduce the country's deficit.