In a startling turn of events, the US government has been shut down overnight as the clock ticked down, after the Senate rejected a budget plan written up by the House Republicans to shoot down Obama’s health reforms. This has been seen as an insane move by some political watchers and a carefully crafted move by others. The main question that is running through everyone's minds now is: what is the economic impact on the USA and are there long term ramifications for such a deliberate aggressive act?
Taking a step back and looking at the political situation, Congress has done itself no favours. A recent CNN/ORC poll show that 10% of Americans approve of their Congress, while 87% disapprove of the current Congress. A 10% approval rating is abysmally bad, and is actually the all-time lowest since approval polls came about. The approval ratings don’t just go one way, the President's approval rating has also taken a drop to 44% compared to five months ago where he scored 53%. However, it is unlikely much will change given the recent re-election of most of Congress when approval ratings were around 20%.
The economic impact has been the main concern for traders and investors. With a government shutdown, around 700,000+ people have been told not to come into work. This means that a large number of public services have ground to a halt, and the business community that services that work force will be adversely affected as they are put out of pocket.
This, in turn, is likely to lead to roughly $1 billion dollars a week missing from the local economies that service these employees. A shutdown for an extended period of time, of say roughly a month, could lead to a loss of $55 billion dollars from the local economy according to Moody’s analytics. These cuts from the local economy are expected to severely impact GDP growth in the US, which has been one of the cornerstone statistics of the recovery. Most analysts are expecting a drop of 0.3–0.4% in the next quarter GDP results. While not a massive drop, it is still a spanner in the gears of the recovery.
The real threat though comes from what lays 2 weeks away, which is the debt ceiling. Earlier this year, the Treasury department enacted extraordinary measures in order to avoid a default. These measures are set to be insufficient come 17th October, which could lead to an actual crisis for the US economy if the Republicans are allowed to play with the gears of the economic recovery.
With a government currently on holiday, markets are looking at it as just another power play from Congress to try and get their way. The current expectation is that they will come to a sort of agreement in the short term in order to avert this crisis. What markets are not seeing is the bigger picture, and that is the impending debt ceiling. It is not that far away, and with each day that draws closer, markets may indeed panic and start to rush into various safe havens. These include the likes of metal markets such as gold – the traditional hedge against fear, as well as safe haven currencies such as the Yen and the Swiss Franc.
I wouldn’t be surprised to see the Republicans play off against the President in the current situation, especially with the debt ceiling. However, if Obama backs down now, he will certainly open the door for future attacks from the Republicans. If there is a time for the President to stand strong, the time is most certainly now. Markets should pay careful attention to this power play and the volatility that may arise in the markets as a result. I for one will be paying close attention, over the next few days, to traditional safe havens, all of which played a big part in the last debt ceiling crisis.
Written by Alex Gurr, Currency Analysts at Blackwell GlobalPublication source