New Delhi: Many key services will be come to a halt on Tuesday, after the White House and Congressional Republicans failed to reach a deal over stop-gap budget measures needed to keep the government running. The two sides have spent months locked in a protracted game of brinkmanship, in which the Republicans told President Obama they would only support the stop-gap measures if he agreed to delay his flagship healthcare programmed by a year. Most people on Wall Street and Capitol Hill assumed that the two sides would reach a last minute solution to stop the US government from having to pull the plug on many of its services. However, the negotiations continued past Monday’s midnight deadline and as a result up to 800,000 public service workers will receive any income from today, until the dispute is resolved. The US shutdown is expected to reduce America’s quarterly GDP growth by around 0.15 percentage points for every week it lasts, costing the US economy billions of dollars and denting consumer confidence.
Depending on how long it lasts, it could also leave the Federal Reserve in the dark about when to start tapering its $85bn-a-month quantitative easing programmed, because it will not be able to get its hands on crucial data about America’s employment situation. Economists are relatively sanguine about the impact a short-term blackout of government services would have on the US economy, but fear that a longer-term shutdown will highlight deep fissures in government that could have much more serious consequences further down the line. Michael Gapen, director of US economic research at Barclays, said on Monday: “A relatively short shutdown of a couple of weeks would have relatively little [economic] impact, but there could be knock-on effects if confidence wanes or a prolonged shutdown signals something worse. It says something about our ability to govern and Investors’ biggest concern is that the Republican-Democrat stand-off over the stop-gap budget will raise the temperature on the even more serious, parallel game of brinkmanship over America’s borrowing limit.
Last week, Gus Faucher, a senior macroeconomist at the bank PNC, warned that a failure to raise the debt ceiling would “all but wipe out” the US recovery, and that “the economy would basically stall. US Treasury Secretary Jack Lew warned last week that the US is set to breach this limit on October 17, but Congressional Republicans are standing firm on the list of concessions they want Obama to make before they will agree to extend the borrowing limit and It is the third time since Obama took power that budget negotiations have gone to the wire in this way, and many investors – jaded by previous stand-offs – were feeling confident that the Congress would reach some sort of eleventh-hour agreement. However, that confidence has started to wane over the past week. Wall Street has started to bet on a long-term stand-off. Meanwhile, treasury officials are pessimistic about the odds of a US government default, which, they fear, would knock America back into recession. On Monday markets on both sides of the Atlantic slipped as both parties stood firm in this high-stakes game of brinkmanship. The UK’s benchmark index, the FTSE 100, fell 50.44 to 6462.22, while in the US, the Dow Jones dropped 128.57 to 15129.67 and the S&P 500 closed down 10.20 at 1681.55.
Markets in Asia edged higher on Tuesday after Japan’s quarterly Tankan survey surged to its strongest level since December 2007, showing that major manufacturers are confident about future prospects. Investors also took heart from data showing Chinese manufacturing activity at its strongest in 17 months, adding to hopes a slowdown has come to an end. However, gains were capped by the US shutdown. Toyko rose 0.55pc, Seoul was 0.74pc higher and Singapore gained 0.77pc while Sydney was up 0.14pc. Hong Kong and Shanghai were closed for a public holiday. Futures contracts points to the FTSE 100 and Dow Jones opening slightly higher on Tuesday, suggesting investors have resigned themselves to a US shutdown. Although, Tracey Warren of CMC Markets warned: “A prolonged shutdown could have a major impact on confidence and on the US economy.”
Bureau report
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