Barack Obama lead the democrats to victory in the US elections at the beginning of the month, being appointed for a second term and defeating the Republican candidate, Mitt Romney. People were already asking what it meant for Britain hours after the result came through.

The most critical aspect of this is the economic issues it raises. Especially with regards to the so-called ‘fiscal cliff’. For better or worse the British and American economies are significantly intertwined. As a result, when the credit crunch hit in the USA it spread to us quite rapidly. As the old saying has it, when America sneezes, the rest of the world catches a cold. Therefore a strong US recovery is essential for Britain and the rest of Europe.

The term ‘fiscal cliff’ was first used by Ben Bernanke, the chairman of the Federal Reserve, who said in February that the US faced "a massive fiscal cliff of large spending cuts and tax increases" on 1 January, 2013. A lot of the economic impact over here will be measured by how Obama deals with the fiscal cliff.

So – how has it been dealt with so far? Legislation passed by the US Congress to cut the budget deficit will mean automatic tax increases for most Americans and spending cuts. The fiscal measures amount to 4 per cent of American output, twice the rate at which the economy is growing, and mean a 10 per cent cut in government spending. This would result in a halving of the budget deficit in just a year.

America took steps to protect itself from the worst effects of the resulting economic downturn. Democrats and Republicans in Congress also tried to reach a deal over public spending, in an effort to reduce the budget deficit. They failed to do so, however, which is what happened, and automatic cuts will come into force in January 2013.

The fiscal measures would have adverse consequences for the US and UK economies. In all likelihood, America would be plunged into a double-dip recession, which would damage the economies of countries like Britain which are reliant on trade with the US.

Work and Pensions Secretary Iain Duncan Smith has said it could have a "bigger" impact on Britain, which has just emerged from its own double-dip recession, than the crisis in the eurozone. This is because of the trade links between the two countries and the fact that Britain is America's biggest foreign investor.

The "fiscal cliff" could be avoided if Democrats and Republicans clinch a deal, perhaps with Barack Obama's party agreeing that tax cuts for high earners should be extended and Republicans accepting that spending cuts should be delayed.

The last four years under Obama have been sluggish at best with continued high unemployment, but the latest economic figures have been encouraging which bodes well for the future. Much in the same way in how we are feeling the effects of a failing Eurozone, it will be interesting to see if Obama is able to convincingly solve the US’s economic problems, given the almost symbiotic nature of the US-UK economies.

The initial impact was minimal. The FTSE 100 reaction was muted and on the morning of Wednesday 7th November, just hours after the result, trading rose a modest 16 points.

It is not surprising that the short term impact on UK businesses is likely to be slim, as Obama will largely concern himself with his urgent domestic problems. Unemployment is currently orbiting 8% and there is a looming ‘fiscal cliff’ crisis, and while these may be US based frailties, the action that Obama takes will undoubtedly impact British businesses.

Foreign investment from the US is responsible for creating many foreign based jobs in the UK, in addition to the valuable transfer of goods and services over the Atlantic. Both Europe and the US invest massive quantities of capital into each other’s economies, and the US in fact invests more capital into Europe than the rest of the world combined. With Obama’s re-election, it does not appear as if this investment will be reduced, and speaking in June the President eagerly highlighted how “slower growth in Europe means slower growth in American jobs.”

Obama will also have to manage Republican resistance, as the House of Representatives continues to have a Republican majority. Now that he has a second term however, he should be better equipped to implement his growth policies in the US and Europe, which should help British businesses.

As Jonathan Lass, a partner in our corporate team says: “Obama’s re-election gives him the opportunity in his final term as President to make a real impact on the US economy to build further growth and stability. At the same time, we can see this week more dynamic leadership and engagement overseas with Asia and the Middle East. Britain’s long-term close relationship with the US across the spectrum and mutual economic links can only benefit”.

Had Romney won, he too would have brought about his own influence on the UK economy. Compared to Obama, Romney was much less popular with the British media, largely due to his tour to the UK in July, which was hampered by a series of gaffes, including his reference to Ed Miliband as ‘Mr Leader’. In addition, his criticism of the UK’s capability of running a successful Olympics in an NBC interview was also met with a fierce reaction from both the British public and MPs.

Despite coming across poorly, there was no doubting Romney’s business acumen. The creation of office superstore Staples, which has over 130 stores in the UK, was assisted by Romney’s investment while he worked at Bain Capital.

Michael Hatchwell, a partner in our corporate team and a Governing Board member says “Obama’s victory will mean that that the status quo continues. If US politicians do not start co-operating more than they have recently, US economic recovery will be slower and that is not favourable for the UK.

“Had Romney succeeded,” he continues “I think there would probably have been more confidence in economic change being achieved, and that would have been good for the UK. But ultimately Romney would have had to demonstrate that he could bring about positive change. Possibly UK/US relations might have achieved something a little bit extra.”

There is a difference, however, between an open election and one in which an incumbent president seeks re-election. Obama had not, in truth, made an overwhelmingly persuasive case for a second term but nor, again, had Romney offered an obviously better argument for his own credentials. In such circumstances the incumbent President gains and probably merits the benefit of the doubt. A second Obama term is, if you will, a Known Unknown whereas Romney offered an Unknown Unknown. Viewed from overseas, the former seems marginally preferable to the latter.