Storm in a teacup? Aviva Investors’ Hillier comments the US shutdown

David Hillier, senior US economist at Aviva Investors, analyzes the impact of the US shutdown on the economy and asset prices.

US stocks and the dollar fell on Monday amid fears a political deadlock in Washington over spending legislation could damage the wider economy.

The US government earlier today responded by beginning its first partial shutdown in 17 years, idling up to 800,000 federal workers as the new fiscal year began at midnight.

The Republican-controlled House of Representatives has submitted a bill to Congress that attempts to link budget funding to an unwinding of President Barack Obama’s healthcare measures. That will not get through the Senate. Obama has said this is the equivalent of a Democrat House demanding a Republican president raise corporate taxes 20%.

Republicans in the House are likely to face a choice of agreeing to an amended bill that funds the government until the end of the year, or of being blamed for government shutdowns.

Having made a visible stand against the president, we expect them to vote for the former. In our view, there is little upside in being blamed for shutdowns. But the Tea Party faction may believe the reverse to be true. If it does, this issue will not be resolved over the next couple of weeks.

Moreover, the latest dispute suggests the government may have some difficulty in securing an accord to raise the country’s debt ceiling. US Treasury officials say a deal to raise the current legal limit of $16.7trn is needed by October 17 or the US government will default.

Negotiations on raising the ceiling look set to go right to the wire as Republicans attempt to get spending reductions built into any deal, and Democrats refuse to play ball on the basis that the debt ceiling is simply a reflection of spending decisions already taken by the House.

At some point before the end of the year – probably late October to early November – a resolution will have to be found. If that’s right, the Federal Reserve’s concern about fiscal policy will not be assuaged until it meets in December.

By that time, it should be clear that the housing market and wider economy has not taken a significant hit from higher market interest rates, so we would expect it to start scaling back bond purchases either then, or at its January meeting.

If things do turn out as we envisage, our underlying view of the economy will be little changed. We see output expanding at an annualised rate of 2.0 to 2.25% between late 2013 and the end of 2014, with growth then picking up to around 2.75% in 2015.

As for financial markets, while we may see volatility increase in the short term, the current impasse in Washington is unlikely to last for long. And since that implies little or no lasting damage to the economy, asset prices should emerge from this episode relatively unscathed.


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