The world holds its breath waiting for a possible US government shutdown. However, its impact should be moderate, and fears may be overstated.
Attention is mounting as a potential US government shutdown approaches. However, experts are urging calm. According to Bank of America, disruptions are likely to be moderate, even if a shutdown begins in the absence of new funding legislation. As of now, Congress has yet to enact any appropriations, so the most interesting developments may still lie ahead.
Bookmakers now estimate the probability of a US shutdown above 65%. In previous instances, market consequences have been minimal: past shutdowns have reduced GDP by only 0.1 percentage point per week, and growth usually rebounded afterward as furloughed workers received back pay. In addition, most essential US government services continue to function.
The main issue is the freeze in official economic data. A prolonged disruption would force the Federal Reserve to rely on private surveys just weeks before its late-October meeting, creating increased uncertainty for policy decisions.
This time, however, the White House has instructed federal agencies to prepare for ongoing staff reductions, not just temporary furloughs. Experts believe this could worsen hiring in Washington. Any sustained layoffs would make economic recovery more difficult, analysts warn.
Markets are unlikely to be shaken significantly since past shutdowns have had little impact on Treasury bonds and the dollar. For example, in 2018, some stocks declined, but that was mostly due to the Federal Reserve's tightening rather than budget issues. Bank of America experts believe that, as before, risk assets, interest rates, and currency markets will weather the shutdown calmly. The bank noted that the current situation does not affect the money market and, unlike debt ceiling standoffs, does not pose any threat of default.
The most significant risk is political, as another budget impasse intensifies perceptions of a dysfunctional fiscal process, experts add.
The situation could change if investors start to believe that Washington's financial paralysis is becoming chronic. For now, the cessation of government funding is only a minor inconvenience, not a crisis. However, it may be an early warning sign for the US, signaling growing doubts over America’s ability to manage its own affairs.
