Washington (AFP) – A U.S. government shutdown would hit an economy struggling to sustain its post-crisis rebound, but experts say the impact will only be substantial if Washington’s political paralysis lasts several weeks.
More than 800,000 non-essential federal workers were to be placed on unpaid furloughs beginning midnight Tuesday, due to the impasse over funding for fiscal 2014, which begins October 1.
Many offices will be closed, and government services will be frozen or cut back in many areas, with payments to contractors also delayed.
That would cut the flow of money into the economy by hundreds of millions of dollars each day, with the impact accumulating the longer the shutdown goes on.
Financial markets sank around the world Monday as investors worried about the political stalemate in Washington. Japanese stocks fell 2.1 percent; European markets, measured by the Euro Stoxx 50 index, lost 0.9 percent; and the S&P 500 gave up 0.6 percent.
But economists said a short-lived closure may not do much damage to the US economy overall.
Analysts at Macroeconomic Advisors said a two-week shutdown would cut 0.3 percentage point off of gross domestic product growth, expected to run at a tepid pace of about 2.5 percent in the third quarter.
“Because we expect any shutdown to be brief, induced effects on private production and repercussions in financial markets would be modest,” they said. “But output would rebound in first quarter of next year.”
On the other hand, a protracted shutdown would more broadly disrupt private sector output and spark more market turbulence.
And if it ties into the concurrent fight over raising the U.S. national debt ceiling — which many say would be a more dangerous development — the damage could be significant.
Federal Reserve Chairman Ben Bernanke cited both issues on September 18 when he surprised markets by announcing that the Fed would continue its $85 billion a month stimulus program.
Bernanke said Fed policy makers were wary of “very serious consequences for the financial markets” of the clash over fiscal issues.
The longer it goes on, the deeper the damage.