US government shutdown scarcely impacts in the short term

In December 2018, US Congress reached a consensus on a bill on funding for the remaining 25% of the US government departments that had not yet been allocated any budgetary resources for the current year. President Trump refused to sign this legislation as it did not include the sum of USD 5.7bn he had demanded for his important project, namely the wall between the US and Mexico. The absence of funding has forced some federal departments to shut down since 22 December, either fully or partially, impacting for example on the Department of the Treasury, the Department of Commerce, the Department of State and the Department of Justice.

The effects of this partial shutdown have been limited to date. Some of the 800,000 employees affected are currently working without pay. Others in less essential positions were sent on unpaid leave. Many of the affected government workers are limiting their spending simply because they are short of money. This will have short-term implications for consumption and therefore also on US GDP data for the duration of the shutdown. If the partial government shutdown lasts until the end of the month, we can expect this to impact on the current quarter GDP by between 0.2 to 0.5 percentage points. Assuming the government workers are paid their salaries retroactively as soon as they can return to work, the consensus expects growth to slow down only very moderately to 2.6% this year (2018: 2.9%). However, the shutdown is expected to have wider negative implications for the US economy. Tax refunds, for example, will be delayed, merger proposals will not be reviewed and economic data not be collected. Companies will not be able to go public. These effects are difficult to quantify.

The US treasuries market has hardly reacted in the good two weeks since the start of the partial shutdown. Although there have been some erratic fluctuations, these were likely triggered instead by expectations as to what the Fed will do, the trade conflict between the US and China and the deteriorating outlook for the global economy. This is unlikely to change if the shutdown ends by the end of the month. The consequences of a longer lasting shutdown cannot yet be estimated.

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