How will US shutdown affect global economy?

The global economy will probably withstand the US 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% impact on US gross domestic product, said Tomo Kinoshita, chief economist at Nomura Holdings 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.

“Investors will likely become more risk-averse due to the shutdown,” said South Korea Finance Ministry Director General Choi Hee Nam. Any impact on the global economy will be short-lived, he said.

The US government began a partial shutdown, 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 that the shutdown could bleed into a fight on how to raise the nation’s debt limit to avoid a first-ever default after October 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. “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.”

If It Lasts a Month...

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 US, 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 US such as Singapore, Malaysia, Taiwan and South Korea would be most affected, he said.

Lost Output

A partial shutdown of the federal government would cost the US at least $300 million a day in lost economic output at the start, according to IHS Inc. 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.

Massachusetts-based IHS estimates that its forecast for 2.2 percent annualised 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, Philadelphia.

“I don’t think there will be a noticeable impact on the other parts of the world because it basically only affects the US 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.

Adverse Effect

South Korea’s economy may face some adverse impact if the shutdown is prolonged, damping American consumption and the US economic recovery, the finance ministry said. 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. “A prolonged shutdown is a different story but previous shutdowns have been short-lived and had a negligible impact on economic activity.”

Beyond the impact on growth, confidence in US policymakers’ 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 S Rajaratnam School of International Studies in Singapore. Chances of a last-minute deal — seen so often in past fiscal fights --evaporated before midnight as the House stood firm on its call to delay major parts of US President Barack Obama’s health-care law for a year. Senate Democrats were equally firm in refusing.

Market Volatility

Asian policy makers are, meanwhile, bracing themselves for increased market volatility.

South Korea will monitor the impact of the US shutdown and financial markets, Finance Minister Hyun Oh Seok said. The country will take steps to stabilise financial markets if needed.

The fallout will depend on how soon the US can resolve its impasse. “In the medium to long term, if there is a US slowdown, it will impact our exports,” Nandalal Weerasinghe, deputy governor of Sri Lanka’s central bank, said. “I am confident that the US, knowing the implications, will come to some resolution, if not today, at least in about a week’s time.”

“We hope that the impasse will be resolved so there is no spillover on the global economy,” said India’s Economic Affairs Secretary Arvind Mayaram. “As of today I don’t see any major impact on the Indian economy on that account.”