Debt ceiling doomsday scenario averted but US economic challenges continue
The unedifying sight of US politicians taking the US economy close to the fiscal brink has tested the patience of investors and voters alike. However, while the tarnished image of US democracy will probably diminish over time, the economic implications of the recent political impasse will live with us over the months and years to come.
Recovery remains weak
Despite the best efforts of the US Federal Reserve, the US economic recovery remains weak, with rising house prices and greater consumer confidence failing to reignite sustainable economic activity. The short-term causes are quite clear. The fiscal sequester that has seen many government-funded projects moth-balled over past months and the more recent shut down of ‘non-essential’ Government services has acted as a major fiscal drag for the US economy. IMF research suggests the impact could be as much as 2.5% of GDP even with a rapid resumption of Government spending.
But the economic repercussion of the political impasse probable runs deeper still. One of the conundrums of recent US economic activity has been the willingness of the corporate sector to favour shareholders through increased dividends and share buybacks at the expense of investment and capital expenditure. By depriving the economy of this vital driver of activity the actions of politicians are doing little to act in the best interest of many of the people who elect them.
Material change in US monetary policy is unlikely
All of this may help explain the real reason why the US Federal Reserve failed to follow through on a possible taper of its asset purchase programme and suggest that while the political wrangling continues any material change in US monetary policy is unlikely. We still believe this to be a mistake as the resultant capital misallocation threatens to create the type of asset price bubbles that do little to create sustainable economic activity, but a lot to undermine stability of the global financial system.