Why and how it will affect other economies
While the US
may be exceptional due to a variety of reasons, one particular reason Americans
are not feeling proud of - is their leaders' ability to shutdown the
government. Following a long drawn conflict over the Affordable Care Act
(colloquially called Obamacare), the Republicans have refused to ratify the
federal budget, thus depriving the government of the resources it needs to
continue running. While the politics itself is extremely complicated, our interest
lies with the impact it will have on the world economy since the US economy is vital
to the global financial system.
Image credit: radiantskies / 123RF Stock Photo
To
understand this; however, we need a quick review of the impact the US shutdown
will have on the US
economy since the impact on the world will be an indirect effect of these -
·
Funding to departments and sections deemed “non-essential” would
be stopped. This would result in a huge percentage of federal workers being
“furloughed”, meaning asked to sit at home without pay.
·
Commodity and services demand from the departments will stop.
·
National parks, museums, etc will be closed, thereby affecting
tourism
·
Even basic services like border-post management, visa application
processing, etc may be affected if shutdown is prolonged
·
Publication of critical reports, such as Employment Reports, will
be delayed.
While not
all of these affect any single country or economic sector, a combination of
some will possibly affect all. Here, we will focus on those weighty
economies/economic zones which will be largely affected -
1.
Canada – Canada is most likely to suffer from the shutdown as it is both
economically and geographically most proximate to the US. Indeed, a major part
of its exports and imports are dependent on the US. Since these depend upon the
huge border that the country shares with US (the longest peaceful border in the
world), any disruption of the border crossings will directly affect the
Canadian economy. Added to these are fears that the work visas needed by
entrepreneurs and professionals for working in the States will get delayed due
to the furloughing of “non-essential” staff.
Further, the cut in government
spending which will be part and parcel of the US shutdown, will reduce demand for Canadian goods
at a time when rising competition and lower demand for exports and slow domestic growth have already subdued the Q3
economic data. In the short run, even more dangerous than the actual reduction
of demand will be the shattered investor confidence caused by the fear of
falling demand and uncertainty surrounding a shutdown in the richest country in
the world. These together lead to a rise in unemployment. Dan Kelly, president
of the Canadian Federation of Independent Business, summed the situation
nicely, “Anyone who has dealings with the U.S. will be a little bit nervous and
the economic impact this could have could affect us all,”
2.
Australia – While Australia is as far from US as Canada is near, the economy
is equally jittery. Here, fears center on the rise in the Australian dollar
(AUD) compared to the US dollar (USD), as confidence in the US greenback is
undermined. This would drive up costs of Australian exports to the US for the
American consumer. Since large portions of the federal workers stand
furloughed, and, therefore, more likely to put off non-essential purchases anyway,
the rise of the AUD bodes ill for the Australian economy.
Further, there are fears that
the negotiations going on in Congress could eventually lead to greater austerity, especially if the
upcoming debates on raising of the US debt ceiling get stuck, as well. This
would reduce demand for Australian products in the long run, thereby hurting
the economy to a much greater extent.
3.
Asia – Asian markets responded with caution to the news of the shutdown. On
one, hand, there are concerns regarding
the tapering of demand from the US. Further, economists fear that the stoppage
of reports, such as the Employment report, would prevent them from predicting
the future trends in demand. This is a pertinent concern since it was after all
poor employment data which persuaded the Fed to put off QE3 tapering, thereby
allowing the Asian markets to continue receiving the FII investment.
However, with the shutdown set
to undermine the US economy to the extent of cutting off about half a percentage point of GDP growth,
the Fed is even more unlikely to taper off the QE3. As Nizam Idris, head of
fixed income and currency strategy at Macquarie Bank Ltd in Singapore noted in the context of Malaysia, “The absence
of agreement on the fiscal front, led to the market thinking that it will mean
the third round of quantitative easing will be sustained for a bit longer.
There’s a lot of foreign demand for Malaysian government bonds” Thus, there is both hope (of QE3 continuing) and fear (of lower demand and
uncertainty) in the Asian markets.
4.
Eurozone – Like Australia, Eurozone's fears primarily center around trade.
With the fall
of the US dollar, the Euro has ended its falling streak, and there are
fears that its rate will now rise to the dollar. This directly affects
exporters, since they had anticipated an exchange rate of $1.30 - $1.32 per
Euro, based upon the steady rate the currency maintained for much of 2012. If
the Euro now rises, these exporters will have to suffer losses.
Further, since the European
Central Bank’s monetary policy is not as liberal as that of the Fed, there
might be an additional price that exporters will have to pay for purchasing
Euros for future delivery. Finally, the reduction of demand caused by the stronger
Euro will directly affect countries such as Spain with higher unemployment
rates. Finally, since inflation is at a low level, the high Euro won't serve
any purpose other than stifling demand.
From the
above analysis, it becomes clear that the US shutdown, though in essence a purely
US development, has already led to uncertainty and confusion in many markets.
Fears relating to the falling dollar, problems of the border post management
and visa processing and delay of key government reports, are already haunting
markets.
Though there
is some optimism in Asia regarding the further reduction of the possibility of
a QE3 tapering, the overall mood in international markets is one of increasing
worry. This is set to worsen as experts fear that a prolonged shutdown would
seriously affect the US economic recovery, and thereby further push down
demand. As such, the whole world, along with all of America, is praying that
the US political leaders see sense and sort out the deadlock at the earliest.
Author: Aritra
Mazumdar
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