Despite previous last-minute agreements such as that over the fiscal cliff, the Democrats and Republicans have failed this time to reach agreement over budget negotiations leading to the much-publicised partial shutdown of the government - the first in 17 years .
Shutdown currently seen as a sideshow
So far the impact on the economy is limited - notwithstanding the real economic impact on thousands of government employees and a likely harsher impact on the local Washington economy, which has a high reliance on government spending; but as with all disruptions a lot hinges on the length of time it takes for an agreement to be reached. To some extent, business has become anaesthetised to the machinations of Washington. Yet, the longer the stalemate continues, the higher the chance of flow-on effects to the real economy.
Impasse over debt ceiling deadline would be greater cause for concern
Currently of more concern – although this could all change if agreement is not reached soon – is how this bodes for the October 17th debt ceiling deadline. October 17th 2013 is the date that the treasury expects the government to exceed its borrowing limit. At which time the Democrats and Republicans will be required to reach agreement on extending the debt ceiling. A failure to extend the limit would mean that the government would be unable to pay all its creditors, with the most likely outcome of this that the government would begin delaying payments. This would lead to a snowball effect with the delays increasing over time if a resolution is not achieved. Most analysts believe that the debt ceiling negotiations will be successful, as they have been in the past, but the lack of agreement over the budget has raised the stakes.
Political brinkmanship weakens the economy
Political uncertainty is never good for the economy. This has been witnessed in recent months with the ambiguity over the Fed’s intentions to taper its Quantitative Easing programme which has led to sharp falls in emerging market currencies. Prolonged uncertainty dampens investor and consumer confidence and at a time of fragile economic growth, confidence is imperative. A shutdown which lasts a few days will provide investors and consumers’ food for thought; a prolonged delay lasting weeks will have a larger impact; but a failure to increase the debt ceiling could derail the economy’s recovery.
Small Business Optimism and Index of Consumer Sentiment: January 2012-September 2013
Source: Small Business Optimism: the National Federation of Independent Business. Index of Consumer Sentiment: the University of Michigan.
Note: Small Business Optimism for September 2013 is a Euromonitor forecast.