Potential Impact of US Government Shutdown on Economy Moody s Warning

As the US government faces a potential shutdown due to a funding impasse in Congress, global financial services company, Moody’s, raises a warning flag. Should the shutdown materialise, disruption would sweep across various US government services, leaving hundreds of thousands of federal workers in a furlough – an involuntary, temporary leave without pay. The impact could spiral beyond the immediate government functioning, casting a significant shadow on the US economy. The fiscal year commencing from October 1 is hanging in balance, awaiting Congress’ decision for provision of necessary funding. The outcome of this standoff holds profound implications not just for America, but for global economies, including India, given the interconnected nature of today’s global financial landscape

In a recent report, Moody’s Analytics warned that a prolonged US government shutdown could have a detrimental effect on the country’s economy. The warning comes at a time when the US Congress is struggling to reach an agreement on the federal budget for the fiscal year starting October 1 According to Moody’s, failure to fund the government services before the deadline could lead to a shutdown, causing a disruption in government services and furloughing hundreds of thousands of federal A government shutdown could not come at a worse time,” said Mark Zandi, Chief Economist at Moody’s Analytics. “The economy is just beginning to recover from the pandemic-induced recession. A shutdown would be a significant setbackworkers without pay. This would inevitably hit the economy, which is already reeling from the impact of the COVID-19 pandemic

The last government shutdown, which lasted for 35 days between December 2018 and January 2019, cost the US economy an estimated $11 billion, according to the Congressional Budget Office (CBO). While most of the lost output was eventually recovered once the government reopened, the CBO noted that around $3 billion was permanently lostThe economic implications of a government shutdown are far-reaching. Besides the loss of government services and federal worker furloughs, it also affects businesses that contract with the government, disrupts financial markets, and deters consumer and business confidenceAs the October 1 deadline looms, the report by Moody’s underscores the urgency for Congress to pass a spending bill and avert a shutdown. The report cautions that the longer the shutdown lasts, the greater the damage to the economy would be



We estimate that a week-long shutdown would reduce real GDP growth in the fourth quarter by 0.2 percentage points, but a month-long shutdown could reduce growth by as much as 1.5 percentage points,” the report addedAs the United States grapples with the economic fallout of the pandemic, the possibility of a government shutdown adds another layer of uncertainty. The decision now lies with Congress to avoid a crisis that could set back the country’s economic recoveryThe U.S.’ credit worthiness is one of its most prized fiscal assets, with global investors relying on the guarantee that the nation can make good on its debts. But now, a leading credit agencies is warning that a possible federal government shutdown this week could tarnish the country’s gold-plated rating

Time is running out for for House Speaker Kevin McCarthy to find a compromise to keep government agencies running and to avoid a shutdown on October 1, the first day of the new fiscal year. If McCarthy and other Republicans are unable to find a solution, funding would expire on September 30 and many agencies would be forced to halt some of their operations. Hundreds of thousands of federal workers also wouldn’t draw a paycheck until the crisis is resolvedWith Congress divided between a Democratic-controlled Senate and Republican-led House — and with some far-right conservatives looking to use the shutdown as leverage to force government spending cuts — many are bracing for a stoppage that could last weeks. While the actual economic impact of a shutdown is likely to be reversed once the government reopens, the damage could be longer-lasting for other reasons, Moody’s Investors Service said Monday in a report

A shutdown would be credit negative” for the U.S. debt, while “A shutdown “would underscore the weakness of U.S. institutional and governance strength relative to other Aaa-rated sovereigns that we have highlighted in recent years,” Moody’s analysts wrote The credit rating firm added, “In particular, it would demonstrate the significant constraints that intensifying political polarization put on fiscal policymaking at a time of declining fiscal strength, driven by widening fiscal deficits and deteriorating debt affordability Moody’s didn’t change its Aaa rating on U.S. debt, but cautioned that the nation’s “lack of an institutional focus on medium-term fiscal planning … is fundamentally different from what is seen in most other Aaa-rated peers, for instance historically in Germany (Aaa stable) and Canada (Aaa stable

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