Shutdown Raises Disquiet Outside U.S. as Impact Seen Muted
The global economy will probably withstand the U.S. government’s first partial shutdown in 17 years even as financial market volatility rises in coming days, analysts and policy makers say.
A one-week shutdown of some government services should have a less-than 0.1 percent impact on U.S. gross domestic product, said Tomo Kinoshita, chief economist at Nomura Holdings Inc. in Tokyo. Halting non-essential government services won’t have much effect on imports from Asian economies, said Richard Jerram, chief economist at Bank of Singapore Ltd.
“Investors will likely become more risk-averse due to the shutdown,” South Korea Finance Ministry Director General Choi Hee Nam said in a telephone interview today before the U.S. government was forced into the shutdown. Any impact on the global economy will be short-lived, he said.
The U.S. government began a partial shutdown at midnight, idling as many as 800,000 federal employees after Congress failed to break a partisan deadlock. Asian stocks pared gains as the lack of immediate plans for further negotiations raised concerns among some lawmakers that the shutdown could bleed into a fight on how to raise the nation’s debt limit to avoid a first-ever default after Oct. 17.
“If it does last two or three days, then the impact should be very limited, but there is obviously a risk that it doesn’t and then we run into the debt ceiling limit as well,” said Robert Prior-Wandesforde, a Singapore-based economist at Credit Suisse Group AG. “Given how high the stakes are, as we’ve seen a couple of times in the recent past, it will be resolved, or at least the can will be kicked down the road once more.”
A shutdown that lasts at least a month could cause 1 to 2 percentage points being knocked off of fourth-quarter GDP growth in the U.S., which would impact demand for Asia, he said. Asian economies that are most export-intensive and have the biggest share of exports going directly to the U.S. such as Singapore, Malaysia, Taiwan and South Korea would be most affected, he said.
The MSCI Asia Pacific Index of equities increased 0.3 percent as of 5:23 p.m. in Tokyo, trimming earlier gains of 0.4 percent. Rising business confidence in Japan helped hold up shares in Europe and Asia, countering the U.S. shutdown.
A partial shutdown of the federal government would cost the U.S. at least $300 million a day in lost economic output at the start, according to IHS Inc. (IHS) While that is a small fraction of the country’s $15.7 trillion economy, the daily impact of a shutdown is likely to accelerate if it continues as it depresses confidence and spending by businesses and consumers.
Lexington, Massachusetts-based IHS estimates that its forecast for 2.2 percent annualized growth in the fourth quarter will be reduced 0.2 percentage point in a week-long shutdown. A 21-day closing like the one in 1995-96 could cut growth by 0.9 to 1.4 percentage point, according to Guy LeBas, chief fixed income strategist at Janney Montgomery Scott LLC in Philadelphia.
“I don’t think there will be a noticeable impact on the other parts of the world because it basically only affects the U.S. economy,” Nomura’s Kinoshita said before the shutdown took effect. “The spillover effects to the rest of the world can be felt through the financial markets.”
South Korea’s economy may face some adverse impact if the shutdown is prolonged, damping American consumption and the U.S. economic recovery, the Finance Ministry said in a statement today after an emergency policy meeting. The halting of operations may fuel capital outflows from emerging markets due to global risk aversion, it said.
“The estimates of the cost of this are low so I think that they’re too small to really have an impact,” said Tim Condon, head of Asia research at ING Groep NV in Singapore. “Obviously, a prolonged shutdown would be a different story but previous shutdowns have been short-lived and have had a negligible impact on economic activity.”
Beyond the impact on growth, confidence in U.S. policy makers’ ability to steer the world’s largest economy may be at stake.
“Countries in the region cannot help but be dismayed by the political paralysis that has gripped Washington in the last few years,” said Evan Resnick, an assistant professor at the S. Rajaratnam School of International Studies in Singapore. “It can’t exactly fill friends and partners of the United States with great confidence to see the U.S. incapable of actually passing a budget resolution.”
Chances of a last-minute deal -- seen so often in past fiscal fights -- evaporated shortly before midnight as the House stood firm on its call to delay major parts of President Barack Obama’s health-care law for a year. Senate Democrats were equally firm in refusing.
Asian policy makers are bracing themselves for increased market volatility.
South Korea will monitor the impact of the U.S. shutdown and financial markets, Finance Minister Hyun Oh Seok said at a parliament session in Seoul today. The country will take steps to stabilize financial markets if needed, Hyun said.
Indonesia is planning more economic measures to add to a package unveiled in August as authorities struggle to shore up a slumping currency. The government will unveil more policy steps in October to expand on what was announced in the previous program, Bambang Brodjonegoro, head of fiscal policy at the finance ministry, said yesterday.
The impact from the shutdown will be on financial markets as it affects global interest rates and stocks, Philippine Economic Planning Secretary Arsenio Balisacan told reporters in Manila today.
“Its impact is likely quite minimal,” he said. “These shocks have been talked about in previous years. But it depends on how long the uncertainty will be. U.S. couldn’t afford to be in that situation for a long time.”
The Philippine central bank will remain watchful of excessive domestic market reaction and step in as appropriate, Governor Amando Tetangco said this week. “We can expect some increase in market volatility because of uncertainty in the manner and length of time before resolution,” he said.
The fallout will depend on how soon the U.S. can resolve its impasse.
“In the medium to long term, if there is a U.S. slowdown, it will impact our exports,” Nandalal Weerasinghe, the deputy governor of Sri Lanka’s central bank, said by phone today. “I am confident that the U.S., knowing the implications, will come to some resolution, if not today, at least in about a week’s time. So it is not such a matter for concern. But if they fail, it will not only impact Sri Lanka but the entire global economy.”
During the partial government shutdown, many government operations will cease. Internal Revenue Service call centers will close and more than 90 percent of Environmental Protection Agency workers will stay home. National parks and museums will be shuttered.
Other services will continue uninterrupted. Social Security and Medicare benefits will be paid. U.S. troops will remain at their posts around the world and will be paid under a bill Obama signed yesterday. Air-traffic controllers and airport security screeners will keep working.
“We hope that the impasse will be resolved so there is no spillover on the global economy,” India Economic Affairs Secretary Arvind Mayaram told reporters in New Delhi today. “As of today I don’t see any major impact on the Indian economy on that account.”
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