We expect no serious further net tightening in US fiscal policy. The budget deficit has closed markedly over the past year, so any deal is unlikely to involve the sort of large government cuts that have hurt the economy this year. An agreement may just be a temporary sticking plaster that funds the government for a few months, meaning this this argument gets repeated again soon.
Goldman Sachs has warned that a two day shutdown of the US Federal government could reduce fourth quarter GDP (annualised) by 0.1 percentage points, and that a shutdown as long as one week could see GDP take a 0.3 percentage point hit.
Over the weekend Republicans in the House of Representatives passed a bill to keep the government running up until midnight on Monday. The amendments that were added were a one year delay to the Affordable Care Act, popularly known as Obamacare and the repeal of US medical device levy.
The shutdown which looks increasingly likely will result in government employees being put on unpaid leave and non-essential government services are closing. The political paralysis gripping Washington comes not long before the debt-ceiling needs to be raised on the 17th October. Despite the political situation it remains unlikely that the US will fail to raise the debt-ceiling. The Senate reconvenes at 7.00pm and is likely to reject the House bill. Analysts see no scope for further spending cuts this year.
Robert Wood, economist at Berenberg: