InvestmentsOct 9 2013

US political stalemate may stymie recovery

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“[But] the longer the US government shutdown goes on, the larger the economic impact will be.

“Beyond two weeks the impact would begin to accelerate, as most wages lost would not be made back and we would begin to see the secondary effects of productivity declines and business decisions put on hold.”

He added that the shutdown in 1995 lasted 21 days and estimates suggest it subtracted roughly 1 per cent from GDP.

Bill O’Neill, chief investment strategist at UBS Wealth Management UK, said the longer the deadlock went on for the more difficult it could be to agree on extending the debt ceiling.

He added there had been 17 US government shutdowns since 1976, with the most recent being in 1995/96 under President Bill Clinton but the risk with the latest one was that the two sides of the political divide were “very far apart”.

“There is not really a process of negotiation being entered into,” he said.

Adding: “The risk this time is of an extended shutdown which then mixes with the debt ceiling debate. The big thing to watch for will be the constituency reaction.”

Mr O’Neill said the US government would be able to use its cash reserves if it failed to agree on the debt ceiling.

“There would be about $50bn which could get them through to early November but it would become difficult,” he said. “It could get to the possibility that something very dramatic happens like the president enacting emergency powers to ensure the country’s debt is serviced.”

Scott Glasser, co-chief investment officer at ClearBridge Investments, agreed a strung-out affair could impact economic growth.

“An ongoing impasse lasting a couple of weeks, however, would begin to reduce fourth-quarter GDP. We expect Congress, at a minimum, will work out a short-term solution over the coming weeks.”

Bryn Jones, manager of the Rathbones Ethical Bond and Strategic Bond funds, said if the shutdown debate led to a “full-blown bundle” about the nation’s debt ceiling, the market would become more volatile.

“That would mean the US could default on its debt, something the rating agencies are likely to take interest in over the next few weeks,” he said.

“No one benefits from this. Amid one of the most ridiculous pieces of politics in US history, GDP could take a hit in what is a modest recovery.”

What happened?

A shutdown of the US government is when all departments considered “non-essential” are closed and the staff placed on unpaid leave.

Non-essential covers such jobs as park rangers, but also affects a large number of Pentagon employees, while staff operating important services such as social security welfare payments stay at their desks.