FANews
FANews
RELATED CATEGORIES
SUB CATEGORIESGeneral | 

US government budget : A wall or a shutdown?

06 September 2017Coface

On August 22, US President Trump threatened a government shutdown if the Congress disagrees to finance the construction of the wall on the border with Mexico.

The shutdown is a process the government must enter into if Congress and the President disagree to pass legislation to finance government operations. It implies the temporary leave of non-essential employees and the reduction of affected agency activities. This announcement adds a new hurdle to Republican’s struggle to reach a budget deal by the end of September, because the 2018 fiscal year will start on 1st October.

The Trump administration plans to reduce corporate tax to 15% from 35% and to reform the personal tax system. Republicans in Congress and the White House now have to choose between passing these tax cuts (and adding USD 2 trillion to public debt in the next 10 years) or making concessions regarding the tax cuts.

Risks

1)US growth currently provides mixed signals : Private consumption is still driven by a tight labour market (the unemployment rate is at 4.3%) due to still buoyant job creation in most sectors, along with wage growth (+3,0% year-on-year in May) and a declining savings rate (now close to its pre-crisis lows).

2) Business insolvencies are still on a downward trend (-6.0% year-on-year in the first half of the year), but there are slow-down signals. Corporate profits (domestic excluding the financial sector) declining (-6.3% year on year in Q1 2017). The bulk of sectors are affected: automotive, metal products, oil and coal, wholesale trade. But profits keep growing in the retail trade, machinery and electrical equipment sectors.

3) A shutdown would add to the uncertainty and could hamper business and consumer confidence: According to a ‘back of the envelope’ calculation, the direct impact of a 1-month shutdown would be negligible. In 2013, the failure to agree on a federal budget meant that around 800,000 civilian workers (out of 2.1 million civil servants) were put on unpaid leave on 1st October. This accounted for no more than 0.5% of total US civilian labour force.

Therefore, in the case of a one-month shutdown (vs two weeks only in 2013), the impact on GDP would be negligible (0.04%). According to this metric, the impact on US growth would start being visible if the shutdown lasts three months (-0.12 percentage point on annual GDP growth). But the indirect effects could be more significant, as both business and consumer confidence could take a hit. Insofar as a part of the current positive dynamic on private consumption results from a declining household savings rate, the latter would increase if consumers are less confident.

4) The ‘safe haven’ status of the US now seems more to risk, at the benefit of the Eurozone, Japan and Switzerland: With higher uncertainties in the US and lower perceived political risk in the Eurozone, following the elections in the Netherlands and France earlier this year, the perceived quality of euro-denominated assets has been boosted over the past weeks.

This trend is likely to continue, as long as the ‘budget drama’ goes on in the US. The implied increased demand for such assets is good news for Eurozone businesses relying on non-self-financing to fund their investment, as it reduces funding costs. But this is bad news for exporting Eurozone corporates and mostly to non-Eurozone countries, as the upward trend on the euro is likely to last.

Quick Polls

QUESTION

Social media is increasingly taking over our lives. You cant put a foot wrong in a world where mass audiences are just a click away. Before you we put our foot in it, should we be purchasing social media insurance?

ANSWER

Yes, the Penny Sparrow and Matthew Theunissen sagas show that we cannot survive without this
No, lets just think before we act or post something online
AE fanews magazine
FAnews November 2017 EditionGet the latest issue of FAnews

This month's headlines

Profiling - the name of the (new) game
Is this end of insurance warranties?
Cause this is thriller
Technology vs human: the ripple effect
Medical schemes’ average increases for 2018
Subscribe now