What will be the consequences of the US govt shutdown for the US and for the global economy more broadly?
First of all we don’t have the full information to assess that, because as far as we know, also looking at past experiences of government shutdowns, it very much depends on how long the shutdown will be.
But we can think of two impacts, one short term impact of the shutdown which is a direct negative impact on GDP, which just to give you a ballpark number—a shock today similar to that was experienced in 1995 when there was the last major shutdown at the beginning of fiscal year. A similar shock today would reduce mechanically growth by 0.1 percentage point of US growth. So it’s not really a big deal.
But of course this would be one impact. We think that given that this would add to policy uncertainty markets would react negatively and this of course can take a number of manifestations through higher volatility, possibly higher interest rates going forward and we know that interest rates in the US have been going up already and this of course relates to the debate about when is tapering appropriate.
So this adds an additional dimension to the picture—the consequences could be more negative on growth. We are looking at the new growth figures for the US, we are still not in a position to have new growth figures for next year and the year after that but certainly what we have seen recently, is that in the US there is growth that is becoming more sustained contrary to what is happening in the euro area. So anything that slows down growth in the US is bad news, this is where we hope growth in advanced economies would be strong going forward.
Is the shutdown likely to prolong the Federal Reserve Bank’s programme of Quantitative Easing?
Well that’s a very good question. This goes back to the question that everybody had in mind when Chairman Bernanke announced the postponement of tapering. Our view is that one of the main reasons behind that was that the assessments that the Fed has had of the US economy was rather weaker macroeconomic performance of the US economy going forward that was initially expected and therefore the decision to hold off tapering.
Will this additional shock impact on monetary policy decisions?—this is very had to tell. Also because of what I said at the beginning: we still don’t know how long it will last. If it lasts a few days, then it will be just a blip. If it is prolonged then the consequences might be more negative.
Will markets be worried at increased political risk, especially in the run up to the debt ceiling deadline of 17th October?
We have seen that already in the past, haven’t we? We have seen that with respect to previous debt ceiling discussions, have seen that with the sequestration episode, with the fiscal cliff and so forth, so let’s just recognise the fact that over the past few years, the fiscal scenario in the US has been highly uncertain. While our recommendation has always been try to be supportive in the short term while at the same time address in the long term the long-term sustainability issues of the US fiscal policy.
What is happening now is that the US does not have a long-term fiscal consolidation plan while at the same time they’re adding to short term fiscal uncertainty. And therefore this has the consequence of possibly holding back spending decisions both in companies and households and therefore to slow down the recovery.
First of all we don’t have the full information to assess that, because as far as we know, also looking at past experiences of government shutdowns, it very much depends on how long the shutdown will be.
But we can think of two impacts, one short term impact of the shutdown which is a direct negative impact on GDP, which just to give you a ballpark number—a shock today similar to that was experienced in 1995 when there was the last major shutdown at the beginning of fiscal year. A similar shock today would reduce mechanically growth by 0.1 percentage point of US growth. So it’s not really a big deal.
But of course this would be one impact. We think that given that this would add to policy uncertainty markets would react negatively and this of course can take a number of manifestations through higher volatility, possibly higher interest rates going forward and we know that interest rates in the US have been going up already and this of course relates to the debate about when is tapering appropriate.
So this adds an additional dimension to the picture—the consequences could be more negative on growth. We are looking at the new growth figures for the US, we are still not in a position to have new growth figures for next year and the year after that but certainly what we have seen recently, is that in the US there is growth that is becoming more sustained contrary to what is happening in the euro area. So anything that slows down growth in the US is bad news, this is where we hope growth in advanced economies would be strong going forward.
Is the shutdown likely to prolong the Federal Reserve Bank’s programme of Quantitative Easing?
Well that’s a very good question. This goes back to the question that everybody had in mind when Chairman Bernanke announced the postponement of tapering. Our view is that one of the main reasons behind that was that the assessments that the Fed has had of the US economy was rather weaker macroeconomic performance of the US economy going forward that was initially expected and therefore the decision to hold off tapering.
Will this additional shock impact on monetary policy decisions?—this is very had to tell. Also because of what I said at the beginning: we still don’t know how long it will last. If it lasts a few days, then it will be just a blip. If it is prolonged then the consequences might be more negative.
Will markets be worried at increased political risk, especially in the run up to the debt ceiling deadline of 17th October?
We have seen that already in the past, haven’t we? We have seen that with respect to previous debt ceiling discussions, have seen that with the sequestration episode, with the fiscal cliff and so forth, so let’s just recognise the fact that over the past few years, the fiscal scenario in the US has been highly uncertain. While our recommendation has always been try to be supportive in the short term while at the same time address in the long term the long-term sustainability issues of the US fiscal policy.
What is happening now is that the US does not have a long-term fiscal consolidation plan while at the same time they’re adding to short term fiscal uncertainty. And therefore this has the consequence of possibly holding back spending decisions both in companies and households and therefore to slow down the recovery.
