Could political ambitions in Washington damage the global economy?
Over the past couple of months, the global economy has been, in general terms, doing better than many had predicted.
Let’s look at some of the facts.
The economy in the UK is today one of the fastest growing in the world, primarily due to an incredible surge in the services sector, which accounts for around 75 per cent of national output. In the last quarter, this vital part of the British economy rose at the fastest pace for almost 16 years and could, according to many experts, fuel growth of 1.2 per cent for Q3 2013 (which would, incidentally, beat the likes of Germany and even possibly Brazil and India too).
In Australia, there’s also been lots of positive economic data recently published. In the last three months, retail spending was up, the sale of new homes increased, and the manufacturing sector grew.
In the US, activity in the services sector has recently been at an 8-year high, claims for unemployment benefit fell more than had been forecast, and US stocks have been rallying.
Even the beleaguered Spanish economy, amongst other peripheral European ones, is expected to exit from recession by the end of the year.
As I say, in very general terms, the global economic situation was doing significantly better recently – although I would argue that the assertion, which has been made by some pundits in the press, that it (the global economy) has truly “turned a corner” would be an exaggeration at this stage.
So, with this generally positive backdrop, the news coming from Washington – about the US government shutting down as the budget deadline passed and major issues over the raising of the nation’s debt ceiling – this week is even more unpalatable because it could seriously undermine the potential of a global recovery.
This is not just my view. It’s one shared by IMF president, Christine Lagarde. Yesterday she commented: “The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the US economy, but the entire global economy.”
She added: “So it is ‘mission-critical’ that this be resolved as soon as possible.”
In a similar vein, the US Treasury Department noted in a statement: “A default would be unprecedented and has the potential to be catastrophic… the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.”
‘D-Day’ is 17th October, the day when the Treasury estimates that it would likely exhaust its cash reserves – meaning the US would default.
It is likely, in my opinion, that the Democrats and Republicans will eventually reach a deal at the last minute. But it is frustrating, to put it mildly, to observe politicians, who are there to serve the best interests of their country, holding it, and potentially a host of other nations too, to ransom for politically motivated reasons.
Yet again it would seem, some elected officials are part of the root cause of the problem when it comes to economic affairs.
Nigel Green deVere Group
Blog written 4th October