Yahoo Finance US debt ceiling threat could ‘snuff out’ economic recovery, S&P warns
A US government shutdown will blow a hole in the strong economic growth of recent months if politicians do not focus their attentions on the impending debt ceiling crunch, analysts have warned.
Defaulting on the debt could even plunge the economy into recession, Standard and Poor’s warned.
Efforts have been focused on the new tax bill rather than extending funding to government agencies, S&P said, which has to be done before Friday, and the debt ceiling deadline of Dec 15. If no resolution is reached then the government will run out of money in the spring.
The economists say the chance is “slim”, but that there are still substantial uncertainties which mean a shutdown could happen, with painful economic consequences.
“Betting the holiday budget on a rational US government may be a risky proposition that leaves the cupboards bare to start 2018,” said the report from S&P’s US chief economist, Beth Ann Bovino, noting that there may be an argument between President Trump and the Democrats if immigration reforms are linked to budget negotiations.
“As the US economy begins to show signs of life and shake off the doldrums of a slow recovery, and Americans hit the mall to get their holiday spirit on as they await the much anticipated tax reform (or cut), the timing could not be worse,” she said.
“In particular, if a shutdown were to take place so far into the quarter, fourth-quarter GDP would not have time to bounce back, which could shake investors and consumers and, as a result, possibly snuff out any economic momentum.”
Her analysis is based on previous shutdowns in 1995-96 and in 2013, studying the impact on the government sector and also on the private sector.
Firms with government contracts lost out directly during those periods, with knock on effects including state employees spending less money, companies hiring fewer workers and investment levels plummeting.
“We saw huge effects during the US debt ceiling crisis in the summer of 2011, with consumer confidence hitting a 31-year low in August, and third-quarter annualized real GDP growing just 0.8pc,” said Ms Bovino.
“Given that this round of debt-ceiling negotiations will happen amid government shutdown threats, the hit to the economy could be even more severe.”
A default caused by a debt ceiling crunch would be even worse.
“Should a default occur, the resulting sudden, unplanned contraction of current spending could see government spending cut by about 4pc of annualized GDP. The economy would fall back into a recession, wiping out much of the progress made by the recovery,” Ms Bovino said.
