Economic impact of budget impasse could be global, reports Katherine Rushton Public sector workers in the US were figuring out whether to go to work on Tuesday after months of negotiations on Capital Hill failed to deliver a budget deal and forced a partial government shutdown.
Depending on the duration of the impasse, the economic impact could be wide ranging, not just for Americans but also for the rest of the world. As of yesterday, it is expected that the US economy will haemorrhage $300m for every day that the budget stand-off lasts. It is a relatively small amount in the context of America's $15.7trillion annual output but one which could make a severe dent in the country's quarterly GDP depending on how long the services blackout continues.
Up to 800,000 government workers have been put on indefinite, unpaid leave and 1m more are being asked to work for free. Scores of "non-essential services", ranging from supervising national monuments to running the passport office, were brought to an abrupt halt. Unsure of when they will receive their next pay cheque or if they will receive back pay, government workers are expected to rein in spending.
Tourists will stop planning trips to monuments and national parks they can't access. A two-week shutdown could shave 0.5 percentage points off fourth-quarter growth; a month-long hiatus could see it cut by as much as 4 percentage points. The initial shock from the shutdown was felt in currency markets as sterling rocketed to a 10-month high, with the greenback trading at $1.62 to the pound. Levels above $1.60 are thought to be uncomfortable for British exporters that depend on trade with US customers.
The falling dollar could also see the number of tourists from across the Atlantic drop as a holiday to the UK has suddenly become a more expensive trip. Although a deal to end the blackout - the first time the US government has shut down in 17 years - is expected, a much bigger and potentially more damaging economic deadline is looming for the US. The stand-off between President Barack Obama and Republicans has shattered confidence in America's ability to govern effectively and heightened fears that it will allow the unthinkable to happen by not extending the self-imposed $16.7 trillion debt ceiling.
The Republicans have taken the same bargaining chip, a delay to Mr Obama's flagship healthcare reform, known as Obamacare, to the negotiations over the borrowing limit. Only in that poker game, the stakes are considerably higher for all concerned. If the US breaches its limit, it will immediately be required to cut around 20pc of its spending - or 4pc of GDP - and will be hurtling towards a default and a credit downgrade that would wipe out many investors. As soon as the US Treasury is unable to repay one of the trillions of dollars of bonds it has sold, it will have technically defaulted on them all, severely damaging investors' faith in the world's largest economy.
This in turn would drag bond prices down and push yields up, fuelling a hike in interest rates - and therefore borrowing costs - the world over. "Even mere discussions about not raising the debt ceiling have negative economic implications," Paul Edelstain, director of US financial economics at IHS Global Insight, said. Meanwhile, the markets are likely to enter a period of volatility that could even overshadow the summer months, when investors were in a constant guessing-game over when the US Federal Reserve would start to pull in its $85bn-a-month bond-buying programme.
The central bank has said all along that it will only start the so-called "tapering" process when it is confident that the employment situation in the US shows a consistent return to health. If the shutdown continues, all bets are off: the Fed will not be able to access the data to tell it whether the jobs situation has improved or not. However, there is a silver lining to the continuing shutdown. Few people believed that the US government would go this far and pull the plug on services.
Economists and investors now hope the embarrassing blackout will lance the boil. "Whether compromise can be reached or one side is forced to capitulate, better to resolve that over a shutdown than with the full faith and credit of the US Treasury in the balance," says Ethan Harris, Bank of America Merrill Lynch's co-head of Global Economic Research.