Global effect of shutdown limited

Financial markets could bear the brunt of rising risk aversion while the global economy will probably withstand the U.S. government’s first partial shutdown in 17 years, analysts and policy makers say.

A one-week shutdown of some government services should have a less-than 0.1 percent impact on U.S. 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,” Korea Finance Ministry Director General Choi Hee-nam said yesterday before the U.S. government was forced into the shutdown. Any impact on the global economy will be short-lived, he said.

The U.S. government began a partial shutdown at midnight, 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 among some lawmakers that the shutdown could bleed into a fight on how to raise the nation’s debt limit to avoid a first-ever default after Oct. 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 AG. “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.

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 United States, 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 U.S. such as Singapore, Malaysia, Taiwan and Korea would be most affected, he said.

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

Lexington, Massachusetts-based IHS estimates that its forecast for 2.2 percent annualized growth in the fourth quarter will be reduced 0.2 percentage point in a weeklong 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 in Philadelphia.

Beyond the impact on growth, confidence in U.S. policy makers’ 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 the S. Rajaratnam School of International Studies in Singapore. “It can’t exactly fill friends and partners of the United States with great confidence to see the U.S. incapable of actually passing a budget resolution.”

Bloomberg