Americans sneeze and Brits catch the flu: A US shut down poses risks to the UK economy

There are some very important deadlines coming in the United States that could potentially have huge effects on the rest of the world including the UK. These are major downside risks to growth, given that recent indicators such as retail sales, manufacturing output, the flash PMIs and durable goods orders all suggest the US economy has lost momentum. The prospect of tapering – where the Federal Open Market Committee would slow its asset purchases from the current $85bn a month seems unlikely before next year.

The possibility that the federal government may shut down is a major concern, as a deal on the debt ceiling looks to be nowhere in the offing. The Republican-controlled US Congress voted to fund the government as long as the Senate and the president agreed to abolish the Affordable Care Act, or what everyone now calls Obamacare. Not a chance in heck of that happening.

The act provides medical insurance coverage to millions of poor people so of course it must be opposed, by the Republicans, who have become the party of “no”. Three million young people have only been able to get coverage by staying on their parents’ plans, including my two daughters. What a terrible thing to do.

The Democrat-controlled Senate have refused to go along with it, despite Senator Ted Cruz’s 20-hour filibustering speech arguing against it. The President has said: “I will not negotiate on anything when it comes to the full faith and credit of the United States of America.” He describes the Republican posture on Obamacare as “we have to shut this thing down before people find out they like it”.

To put this in context this is the 42nd time that House Republicans have voted to de-fund Obamacare. I repeat: 42 times. It’s hard to see how compromise comes with these intransigent right-wing extremists. They hate Obama with a passion: the suspicion is because he is black.

According to the World Health Organisation, life expectancy in the United States, ranks 33rd in the world, behind even Portugal, Greece, Italy and Spain. They have a poor healthcare system that doesn’t deliver for many Americans. Obamacare is a major step in the direction of fixing that problem. People with a conscience support it. Obama hasn’t blinked.

There are several crucial dates that are fast approaching. First, today, which is when the fiscal year ends. If there is no agreement by tomorrow, which is looking very likely, then we will have a government shutdown.

Second, on 17 October the government will exhaust the emergency measures it has used since May to allow the government to continue borrowing money. On that date, the government is scheduled to roll over $120bn in maturing debt.

Third, 22 October, which the Congressional Budget Office estimates is the first date the government could potentially exhaust all of its reserves and begin missing payments. The debt ceiling needs to be raised by more than $1trn to cover the government’s obligations in 2014.

The 1995 shutdown of large parts of the federal government depressed fourth-quarter 1995 growth by about half a percentage point. So this will be bad for growth in the UK because, in contrast to former Bank of England Governor Lord King’s oft-repeated and dubious claim that the US and UK “decoupled”, they haven’t.

That would mean what happens in America stays in America, which is clearly untrue. Globalisation is the opposite of decoupling – it means every country is in it together. Americans sneeze and Brits catch the flu. The worry for George Osborne is that a government shutdown in the US and/or a refusal to extend the debt ceiling inevitably pushes down on his much-publicised “turning the corner”. All of this represents downside risks to the British economy.

The latest gross domestic product estimate for the UK was published last week, and confirmed that growth in the second quarter of 2013 was 0.7 per cent, but as Capital Economics has noted, the shape of growth was not quite as good as previously thought. The news that the current account deficit reached a massive 5.5 per cent of GDP at the start of the year will reinforce concerns about the shape and strength of the recovery.

The first-quarter deficit was revised from £14.5bn to a huge £21.8bn. And the breakdown now looks a bit less favourable than before. Stockbuilding was previously estimated to have pushed down on growth, but is now estimated to have accounted for about a third of Q2’s quarterly rise in GDP.

Offsetting that, the contributions from consumer spending, investment and net trade have all been revised down. Business investment disastrously decreased by £786m to £28.7bn, down 2.7 per cent compared with the previous quarter.

Household spending has increased by 0.3 per cent but still remains 2.8 per cent below the peak of spending in volume terms in Q4 2007. Growth is already looking fragile.

The concern is that most workers in the UK are still hurting; growth hasn’t done anything so far to raise their pay packets, and shows no likelihood of doing so under the Coalition. Mr Osborne couldn’t care less.

New figures from Eurostat, the European Union’s statistical agency, which publishes data in comparable form, show how much worse workers in the UK are doing compared with their compatriots in most other EU countries.

The chart above reports wage changes compared with the same quarter of the previous year, both in nominal terms and in real terms adjusted for inflation.

Workers in the UK saw wages rise by only 0.6 per cent, which means that their real wages fell 1.9 per cent. Real wage growth in the UK ranks 23rd out of the 28 EU countries, and well below Germany, France and Italy.

Workers in half the EU countries are experiencing real wage growth, but not in the UK.

So the Coalition is trumpeting that all is well with the economy, but what about the average worker? Focusing on falling living standards while the high-paid enjoy their tax breaks and bonuses looks like a winning strategy for the Labour Party. Britain can do better than this.