Advertisement

HindustanTimes Wed,23 Jul 2014

World

US economy faces hefty hit if government shuts down
AFP
Washington, October 01, 2013
First Published: 08:42 IST(1/10/2013)
Last Updated: 08:46 IST(1/10/2013)

A US government shutdown would hit an economy struggling to sustain its post-crisis rebound, but experts say the impact will only be substantial if Washington's political paralysis lasts several weeks.

 


More than 800,000 non-essential federal workers were to be placed on unpaid furloughs beginning midnight (0400 GMT Tuesday), due to the impasse over funding for fiscal 2014, which begins October 1.

Many offices will be closed, and government services will be frozen or cut back in many areas, with payments to contractors also delayed.

That would cut the flow of money into the economy by hundreds of millions of dollars each day, with the impact accumulating the longer the shutdown goes on.

Financial markets sank around the world on Monday as investors worried about the political stalemate in Washington. Japanese stocks fell 2.1%; European markets, measured by the Euro Stoxx 50 index, lost 0.9%; and the S&P 500 gave up 0.6%.

But economists said a short-lived closure may not do much damage to the US economy overall.

Analysts at Macroeconomic Advisors said a two-week shutdown would cut 0.3 percentage point off of gross domestic product growth, expected to run at a tepid pace of about 2.5% in the third quarter.

"Because we expect any shutdown to be brief, induced effects on private production and repercussions in financial markets would be modest," they said. "But output would rebound in first quarter of next year."

On the other hand, a protracted shutdown would more broadly disrupt private sector output and spark more market turbulence.

And if it ties into the concurrent fight over raising the US national debt ceiling -- which many say would be a more dangerous development -- the damage could be significant.

Federal Reserve Chairman Ben Bernanke cited both issues on September 18 when he surprised markets by announcing that the Fed would continue its $85 billion a month stimulus program.

Bernanke said Fed policy makers were wary of "very serious consequences for the financial markets" of the clash over fiscal issues.

The longer it goes on, the deeper the damage.

Mark Zandi of Moody's Analytics said a month-long shutdown could take up to 1.4%age points from growth.

The impact will be scattered. National Parks and museums will close, hurting tourism in some areas. Various permit services, such as the issuing of passports, would halt, hurting businesses and travelers.

Possibly 400,000 civilian defense workers would stay at home, slowing down contracts with private suppliers.

The largest impact would be in the federal hub Washington, which could lose $200 million a day, Stephen Fuller of George Mason University told the Washington Post.

But Jim O'Sullivan at High Frequency Economics said that, as long as furloughed federal workers get paid for the days they miss -- which Congress has allowed after past shutdowns -- there should not be much impact.

However, there could be bad implications if the closures lead to a plunge in investor confidence in equity markets.

"We see no sign of panic," said O'Sullivan. "Still, perceptions could change if the shutdown lasts for more than a few days and there is no compromise on the debt limit."

A refusal of Republicans in Congress to agree an increase in the country's statutory borrowing limit has analysts increasingly concerned.

The government spends around $60 billion a month more than it brings in. That money that is already committed and so funding must be found or something else must give.

The Treasury says it will run out of cash and flexibility from October 17, and if the statutory cap on borrowing is not increased, it will have to withhold some checks.

That could mean missing payments for salaries, retirement and health benefits, or even debt service -- though that might not show up until the end of October.

"If the government loses its legislative authority to borrow, it would need to slash spending to pay all of its bills," said Douglas Porter, chief economist at BMO Capital Markets.

Such cuts "could easily tip the economy into recession, and that's not even considering the ripple effects on confidence and markets of a possible technical default," he said.


Advertisement
Copyright © 2014 HT Media Limited. All Rights Reserved