Washington biggest risk to US economy

Written by Reuters | Washington | Updated: Oct 18 2013, 07:03am hrs
Consensus may be hard to find in Washington these days, but many corporate executives and economists seem to agree on one point: The biggest risk to the worlds largest economy may be its own elected representatives.

Down-to-the-wire budget and debt crises, indiscriminate spending cuts and a 16-day shutdown may not be enough to push the US economy back into recession. But Washingtons policy blunders in recent years have significantly slowed economic growth and kept roughly 2 million people out of work, according to recent estimates.

Steep spending cuts are a big reason. But the governance-by-crisis also may be prompting businesses to sit on their cash rather than building new factories, buying more equipment and hiring more workers, some economists say. Increasingly Im of the view that the reason why our economy cant kick into a higher gear is because of the uncertainty created by Washington, said Mark Zandi, chief economist of Moodys Analytics.

Congress on Wednesday voted to reopen the government and extend its borrowing authority through February of next year. But the deal did nothing to resolve the underlying disputes that led to the crisis in the first place leading many to fear that the standoff may play out again in a few months. The plan sets up a forum to try to forge a more permanent budget deal, but few expect it to succeed.

We have crisis after crisis after crisis and it has a corrosive impact on the economy, said Potomac Research Group analyst Greg Valliere. If youre a business, how do you make plans in this environment

Since the financial crisis eased, Washington has sent out one jolt after another. Democrats passed sweeping reforms of the healthcare system and the financial sector in 2010 which, whatever their merits, imposed wrenching changes on two pillars of the US post-industrial economy. Even many of those who disagree with the notion that policy uncertainty has hurt the economy agree that the spending cuts and tax increases should have been phased in more gradually.

Fiscal consolidation has been a big drag on the economy, said Paul Ashworth, an economist with Capital Economics.

Though Washington may be responsible for lacklustre business on Main Street, it may not have much of an impact on Wall Street. Many economists had expected the Fed to begin scaling back its stimulus programme last month. The chaos in Congress means it now probably wont begin pulling back its bond purchases until next year. I think the markets are beginning to learn how to live with Washington dysfunction, said Valliere.

Chinese agency cuts US credit rating by a notch

A Chinese ratings agency cut its credit rating for US sovereign debt by one notch to A-minus from A on Thursday, saying a deal struck by Congress to raise the governments borrowing ceiling failed to solve the cause of its debt problem. Dagong Global Credit Rating said that the temporary fix of the debt issue would not defuse the fundamental conundrum of the US fiscal deficit, but could trigger defaults at any time in the future.