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Canadians fear U.S.”fiscal cliff”

Jennifer Kwan

A new survey highlights it. Economists are talking about it. And the economic and market outlook of Canada and the U.S. could be significantly impacted by it. Everyone is bracing for the "fiscal cliff."

Nearly two-thirds of Canadians polled in a new study fear Canada's economy will be hurt if the so-called U.S. "fiscal cliff," a term coined to refer to the detonation of tax increases and spending cuts at the start of next year, isn't resolved relatively quickly. The survey was conducted by Ipsos Reid for Sun Life Financial and released on Wednesday.

"Along with high debt levels and a slowing real estate market in Canada, the fiscal cliff situation in the U.S. is giving Canadians another reason to worry about the Canadian economy," said Sadiq Adatia, chief investment officer at Sun Life Global Investments, in a statement.

The poll found that 63 per cent of Canadians are concerned that Canada's economy will suffer from the impact of the "fiscal cliff." It also indicates that 54 per cent of those polled are not better off financially than they were a year ago.

The survey, which polled some 1,277 Canadians in late November, comes a day after Bank of Canada Governor Mark Carney warned Canada would be threatened with the possibility of another recession if U.S. President Barack Obama and Congress can't strike a deal to avoid steep tax hikes and spending cuts set for Jan. 1.

In a conference call on Wednesday, senior executives at the Bank of Montreal discussed the potential impact of the fiscal dilemma on both sides of the border. In Canada's case, the cliff could be "the straw that breaks the camel's back and sends the Canadian economy into recession," said Paul Taylor, chief investment officer of fundamental equities at BMO Asset Management.

Meanwhile, the U.S. Federal Reserve boosted its stimulus to the economy on Wednesday, in a measure known as quantitative easing. That move also placed more attention on the controversial fiscal talks.

"In being tied to economic outcomes on jobs and inflation, QE could last 2 months or 22 months," economists at TD Securities wrote in an analysis of the Fed statement. "How this program will evolve will depend critically on how Washington achieves a fiscal fix."

The word "depend" seems key these days, most agree.

"The way I'd characterize it is we've got this pot of water and our economy is this little frog sitting in the water," said Jack Ablin, chief investment officer at BMO Private Banking.

"Right now everything is fine, but start January 1st the heat is turned on. Depending on how long it takes to negotiate a grand bargain or some sort of longer term resolution really determines how much heat there is on the economy."