US economy can weather short storm - S&P

AP

President Barack Obama gestures as he speaks to reporters in the White House briefing room in Washington following a meeting with congressional leaders regarding the automatic spending cuts.

Washington -

The United States economy can weather the drastic spending cuts known as the sequester if they are short-lived, ratings firm Standard & Poor's said Friday.

S&P said the cuts, as well as a potential government shutdown at the end of March due to the budget fight, “could have far-reaching, although probably shallow, effects on the US economy and its prospects for a strengthening recovery.”

The across-the-board $85 billion in spending cuts over the next seven months are scheduled to take effect Friday unless President Barack Obama and Republican lawmakers strike a last-ditch deal before midnight, seen as highly unlikely.

The entrenched political gridlock in Washington over budget deficit reduction and the uncertainty it has generated remained the biggest threats to the US economic recovery, S&P said.

The ratings firm said it had long assumed that the sequester cuts would take place, but it believed they would be temporary and replaced in the second quarter by a long-term package of spending cuts and tax increases.

“If this proves true, we think the sequester would still likely have only a mild downside effect on GDP growth this year,” the company said.

“If sequestration were to persist for the rest of the year, which we view as unlikely, we would trim our 2013 growth forecast by about half a percentage point.”

The Obama administration also estimated the economy, which barely grew in the 2012 fourth quarter, would take a 0.5 percentage point hit in 2013 if the cuts are fully implemented.

S&P projected if the sequester was not modified, it would bring annual growth down to about 2.0 percent, below its current forecast of 2.7 percent.

S&P expressed concern about March 27 expiry of government funding under the stopgap “continuing resolution”, a substitute for a full formal budget.

If Congress fails to extend the current continuing resolution, the government would be forced to shut down services it deemed nonessential.

S&P calculated that each week of a shutdown would trim 0.2

percentage points from growth.

“The good news is that if Washington works through a deal fairly quickly, the underlying momentum in the US economy would help it withstand these drags on growth,” it said. - Sapa-AFP