Uncertainties in the US haunt global economy

With the global economy growing more slowly than expected, worries about a potential US government shutdown and the possibility of a default are keeping nations around the world and investors, cautious.

Republicans in the US House of Representatives have so far refused to give in to President Barack Obama’s demands for straightforward bills keeping the government running beyond September 30.

House Republicans also challenged Obama on the debt ceiling increase, the amount the government is allowed to borrow; that the Treasury Department of the world’s largest economy says is urgently needed by October 17.

There is an October 1 deadline for Congress and the President to sign off on an emergency spending bill to avert a government shutdown. This is not the critical event that immediately leads to the risk of impending default – that comes on October 17 according to US Treasury Secretary Jack Lew – but it is significant enough that it can undermine investor confidence and further stymie an economic recovery.

Last week Lew cautioned Congress that the United States would exhaust its borrowing capacity no later than October 17, at which point it would have only about $30bn in cash on hand.

The fresh estimate adds another layer of pressure on lawmakers to raise the $16.7tn debt limit and comes as Congress struggles to pass a spending bill to keep the government funded beyond October 1, when the new fiscal year starts.

“If the government should ultimately become unable to pay all of its bills, the results could be catastrophic,” Lew warned in a letter to congressional leaders.

The fate of the debt ceiling is up in the air with Democratic and Republican lawmakers once again deeply divided over how to extend the Treasury’s borrowing authority.

The trouble lies in the Republican-controlled House of Representatives push for a bill that includes a delay or complete halt to the Affordable Care Act (nicknamed “Obamacare”) legislation passed in 2010 and set to start this year. The President and Democrat-controlled Senate have rejected negotiation over the add-in.

Congress is expected to continue debating the bill over the weekend, but time is running preciously low even for the routine of passing the legislation and sending it to the other house.

Undoubtedly, financial troubles in the US will rock global economy, which cannot afford it at a time of increasing risks to growth, particularly in Europe and major emerging markets such as China, India and Brazil.

In its last world economic outlook IMF projected global growth at 3.1% for 2013 and 3.8% for 2014, a downward revision of ¼ percentage point each year compared with the forecasts in the April 2013 WEO.

An early solution to the current  uncertainties in the US would be in the interest of the gasping global economy.

As IMF stressed there is an urgent need for structural reforms across all major economies, to lift global growth and support global rebalancing. As in the past, this means steps to raise domestic demand in economies with large current account surpluses and measures that improve competitiveness in economies with large current account deficits.