Abu Dhabi, UAEFriday 23 August 2019

Prolonged US government shutdown will exacerbate investors' worries amid Washington turmoil

S&P estimates the overall effect could shave $1.2bn off the US GDP for each week the shutdown continues

A visitor takes a photograph outside the White House. President Donald Trump has threatened to close the US-Mexico border amid a partial federal government shutdown that appears likely to stretch into 2019. Bloomberg
A visitor takes a photograph outside the White House. President Donald Trump has threatened to close the US-Mexico border amid a partial federal government shutdown that appears likely to stretch into 2019. Bloomberg

The US government shutdown will not have an immediate impact on the country's economy but a prolonged crisis could exacerbate worries for investors and businesses amid rising interest rates, international trade tensions and turmoil in Washington, economists warned.

The partial closure entered its second week on Saturday as the White House and Congress remain deadlocked over President Donald Trump’s demand for $5 billion (Dh18.3bn) to pay for a border wall between the United States and Mexico.

The result is about a quarter of government offices are closed and 800,000 federal workers are on unpaid leave or working without pay.

With the closure falling over two holiday weekends so far, analysts are sanguine about the initial effects but fear deeper consequences if the impasse lasts far into 2019, foreshadowing clashes between Mr Trump and the Democrats when they take over the House of Representatives on Wednesday.

Scott Baker, associate professor of finance at Northwestern University, who analysed the impact of a similar shutdown in 2013, said unpaid workers then cut their spending by 10 per cent while those sent home reduced their outgoing expenses by as much as 16 per cent.

That has a knock-on effect in places such as Washington DC where the local economy is reliant on the spending of federal workers, he said.

However, long-term outcomes are minimised if the closure is brief and workers receive arrears later – as it happened in 2013 - although the effect on consumer and investor confidence is likely to be more problematic.

“A few days’ shutdown is usually not too painful in lots of different ways,” he said. “As it goes longer it gets more and more disruptive and there is more pressure to find a solution.”

Rating agency Standard and Poor's estimates the overall effect could shave $1.2bn off the US gross domestic product for each week the shutdown continues, what it described as a “modest, if not muted” impact on the $19 trillion economy.

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The shutdown began last Saturday when Mr Trump refused to sign a spending bill that did not include his border wall money. As the clock ticked past midnight, funding ran out for nine government departments – including state, homeland security and transportation – as well as dozens of other agencies.

Among the effects are national parks are forced to close, or operate with a skeleton staff; much of the Internal Revenue Service has been sent on leave, including those who help taxpayers with queries; and some courts have paused cases where government lawyers are now not available.

Limited operations at several departments will send a ripple through the business world and money markets.

From Thursday, the Securities and Exchange Commission said it was running with a “very limited number of staff” available only for emergency situations.

The commerce department is closed and will not be publishing any of the economic data vital to policymakers and investors. The Federal Housing Administration and Small Business Administration will not be processing home or small business loans either.

About 420,000 workers are deemed essential – responsible for border security, for example – and are working without pay. But another 320,000 have been sent home or are “furloughed”.

Opposition Democrats say Mr Trump’s claims about the need for a wall are exaggerated but the president shows no sign of backing down.

In a recent tweet he threatened to shut the entire border with Mexico.

“We will be forced to close the Southern Border entirely if the Obstructionist Democrats do not give us the money to finish the Wall & also change the ridiculous immigration laws that our Country is saddled with,” he wrote on Friday.

The Senate and House adjourned on Thursday and are due to reconvene on Monday.

Updated: December 29, 2018 02:28 PM

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