The US debt ceiling showdown in Congress is fast approaching a potential early June deadline.
Republicans and Democrats appear to be at an impasse with no progress made towards a deal.
These are the four scenarios and their potential impact on the US economy, according to Ned David Research.
The latest debt ceiling showdown appears to be extraordinary as no party is in full control of Congress, and that could lead to disastrous outcome for the US economy, according to a Wednesday note from Ned Davis Research.
While the ongoing US debt ceiling showdown in Congress is nothing new for investors, as the debt limit has been raised year after year with a typical show of political theater, it could have grave implications if the crisis isn’t ultimately solved this time around.
“Market participants have been conditioned over the years to expect that any debt ceiling impasse would be resolved in time to avoid a default, even if it comes down to the wire. It runs on the trust that politicians understand that the potential consequences of a default are too dire, including wreaking havoc on the global financial system and causing a recession in the US and possibly the global economy,” NDR explained.
“While we expect that the debt limit will be adjusted again, we see a significant risk of financial market volatility between now and the X-date of June 1,” NDR said.
These are the four potential outcomes of the current US debt ceiling showdown in Congress, according to the note.
1. Standoff continues past the X-date – 5% odds.
In this most dire scenario, the US government would partially default on its debt due to political brinkmanship between Democrats and Republicans. The government would miss payments to retirees, veterans, military personnel, and contractors, but it would continue to make bond payments.
Because of a partial default, US debt would be downgraded by credit agencies, which would lead to investors demanding a higher risk premium. There would be a decline in confidence and spending among consumers, and the US economy would fall into a recession. This is the worst possible scenario for the stock market.
2. Clean debt ceiling increase – 10% odds.
In this scenario, a debt default would be fully averted thanks to the Republicans giving up on its spending cut demands at the last minute. In this scenario, there would be no change to the outlook for economic growth in 2023.
3. Biden caves to some Republican demands – 20% odds.
In this scenario, a US debt default would be averted because Biden would give into some spending cut demands from Republicans. Government spending cuts would go into effect for 2023 and 2024. This would lead to rising uncertainty among investors and businesses, as spending approved by one Congress could be undone by the next, especially with the likelihood that the next debt ceiling deadline down the road could be leveraged by the minority political party. This scenario would lead to slower economic growth in 2023 and 2024.
4. Debt ceiling suspended – 65% odds.
In this scenario, Congress suspends the debt ceiling limit, creating time for extended negotiations. This scenario would avert a debt default, though some government spending cuts would be likely. If Congress kicks the can down the road for a few months into Fall 2023, the same issues today would resurface then and it would add the risk of a potential government shutdown. This scenario would lead to slower economic growth in 2023 and 2024.
“We favor the outcome of a temporary debt ceiling suspension either for a brief period of time or until September when Congress will be debating the budget for the next fiscal year. The government has done this repeatedly, including seven times between 2013 and 2019,” NDR said.
OTTAWA – The parliamentary budget officer says the federal government likely failed to keep its deficit below its promised $40 billion cap in the last fiscal year.
However the PBO also projects in its latest economic and fiscal outlook today that weak economic growth this year will begin to rebound in 2025.
The budget watchdog estimates in its report that the federal government posted a $46.8 billion deficit for the 2023-24 fiscal year.
Finance Minister Chrystia Freeland pledged a year ago to keep the deficit capped at $40 billion and in her spring budget said the deficit for 2023-24 stayed in line with that promise.
The final tally of the last year’s deficit will be confirmed when the government publishes its annual public accounts report this fall.
The PBO says economic growth will remain tepid this year but will rebound in 2025 as the Bank of Canada’s interest rate cuts stimulate spending and business investment.
This report by The Canadian Press was first published Oct. 17, 2024.
OTTAWA – Statistics Canada says the level of food insecurity increased in 2022 as inflation hit peak levels.
In a report using data from the Canadian community health survey, the agency says 15.6 per cent of households experienced some level of food insecurity in 2022 after being relatively stable from 2017 to 2021.
The reading was up from 9.6 per cent in 2017 and 11.6 per cent in 2018.
Statistics Canada says the prevalence of household food insecurity was slightly lower and stable during the pandemic years as it fell to 8.5 per cent in the fall of 2020 and 9.1 per cent in 2021.
In addition to an increase in the prevalence of food insecurity in 2022, the agency says there was an increase in the severity as more households reported moderate or severe food insecurity.
It also noted an increase in the number of Canadians living in moderately or severely food insecure households was also seen in the Canadian income survey data collected in the first half of 2023.
This report by The Canadian Press was first published Oct 16, 2024.
OTTAWA – Statistics Canada says manufacturing sales in August fell to their lowest level since January 2022 as sales in the primary metal and petroleum and coal product subsectors fell.
The agency says manufacturing sales fell 1.3 per cent to $69.4 billion in August, after rising 1.1 per cent in July.
The drop came as sales in the primary metal subsector dropped 6.4 per cent to $5.3 billion in August, on lower prices and lower volumes.
Sales in the petroleum and coal product subsector fell 3.7 per cent to $7.8 billion in August on lower prices.
Meanwhile, sales of aerospace products and parts rose 7.3 per cent to $2.7 billion in August and wood product sales increased 3.8 per cent to $3.1 billion.
Overall manufacturing sales in constant dollars fell 0.8 per cent in August.
This report by The Canadian Press was first published Oct. 16, 2024.
