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U.S. Economic Weakness Makes Austerity Tougher, Goodhart Says

The U.S. government may find it hard to push through austerity measures to reduce the budget deficit as the economic recovery falters, former Bank of England policy maker Charles Goodhart said.

“What has really been a worry over the last few weeks has been that the American economy has proven to be much weaker than expected, even before any fiscal austerity,” he said in an interview today. “That’s a concern because you combine an underlying weak economy with the need to make a start on fiscal retrenchment and you have a pretty difficulty scenario.”

The U.S. Senate will vote today on a debt-limit compromise after lawmakers agreed over the weekend to raise the nation’s borrowing ceiling in return for cutting spending by $2.4 trillion or more. The shift from stimulus to austerity coincides with a slowdown in the recovery. Manufacturing almost stalled in July, threatening to deprive the recovery of one of its main drivers.

“The problem that the American political scene is so extremely divided means that we have simply pushed the problems yet further down the road without really getting a resolution,” said Goodhart, speaking after an event in London hosted by Fathom Financial Consulting. “What has happened has simply been a short-term compromise to delay taking the difficult decisions.”

A report last week showed that the U.S. economy grew at an annual rate of 1.3 percent in the second quarter following 0.4 percent in the first three months. The jobless rate probably held at 9.2 percent in July after rising in each of the previous three months, according to the median of 80 estimates in a Bloomberg News survey. The jobless data are due on Aug. 5.

Credit Rating

Political wrangling over raising the debt ceiling led to concerns the U.S. may lose its top AAA credit rating unless an agreement was reached by the end of today, when the country reaches its current borrowing limit. Still, Standard & Poor’s has said the world’s largest economy still faces the risk of a downgrade over the outlook of its longer-term public finances.

“The problem with the debt ceiling was never one of solvency, it was always one of liquidity,” Goodhart said. “The American ability and capacity to pay off their debt remains just as great as it always was.”

He said the “greater concern” has been the economy’s weakness, not the debt-ceiling debate.

“A credit rating write down from AAA to AA will have very little effect,” Goodhart said. “The U.S. treasury market will still be the most liquid and the safest market in the world. I don’t think there will be a significant risk premium required at any speed.”

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