Written by Shane Balkham
The US government avoided a shutdown late last night, as a dramatic vote at the weekend saw House Speaker Kevin McCarthy navigating around Republican rebels that have been hounding him for weeks. With less than an hour to go, the White House released a statement at 11:15pm advising that President Biden had signed the measure on a short-term funding deal.
No good deed goes unpunished in US politics. While Kevin McCarthy may be congratulated by some for buying Congress a few more weeks to negotiate spending priorities and averting a government shutdown, it seems his actions may cost him his job.
Rather than try to placate the far-right rebels, whose demands were too outlandish to pass the spending bill, McCarthy instead pushed ahead with Democratic support and only half of that of the Republicans. This triggered a response from the rebels who threatened to topple McCarthy if he opted to push legislation forward that needed Democratic support to pass. The challenge opens up an unpredictable political skirmish this week, as the band of Republican rebels have now made good on the threat of toppling McCarthy.
It is no wonder that the rating agencies look upon the US with tired eyes. It was only in August that Fitch downgraded the credit worthiness of the US, on the back of weaker governance and heightened political tensions. Last week also saw Moody’s, another rating agency, warn that a government shutdown would be ‘credit negative’ for the US rating and underscores the continued weakness of US governance.
It was better news for the UK. The Office for National Statistics (ONS) revised the growth for the UK economy in the first quarter of 2023 up to 0.3% from the earlier estimate of 0.1%. The ONS estimate for second quarter growth remained unchanged at 0.2%. Growth was also faster than expected last year, up to 4.3% for 2022 revised from an estimate of 4.1%.
However, it is always worth remembering that the US economy is still arguably the most influential economy in the world and how the US government conducts itself still matters to global investors. Downgrades in ratings could increase the cost of debt for the US government, at the same time they are trying to ratify future spending plans. With the Federal Reserve currently navigating the potential end of its hiking cycle, these are unwanted distractions at a time of important decision making. It is also worth remembering that any significant disruptions or increased costs in the US, resulting from downgrades and fiscal challenges, could have knock-on effects on the global economy, including the UK.
Political pressure is building and taking centre stage once again, even before we have entered the political circus that will be 2024’s Presidential Election campaign. Media noise and volatility will likely increase, making it critical that investors have robust long-term multi-asset portfolios, with appropriate levels of diversification.
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