UBS On-Air: Paul Donovan Daily Audio 'How bouncy is the bounce back?'
The desk believes that the current US government shutdown will likely have a moderate negative impact on growth due to the absence of back pay for furloughed workers, as discussed by Paul Donovan of UBS. This impact could be exacerbated if consumer spending declines due to uncertainty around job security. Per the full note, the economists typically view government shutdowns as resulting in deferred economic activity rather than a permanent loss; however, the current situation may challenge that presumption depending on government actions regarding compensation. With no high-impact events on the horizon, focus will remain on economic data releases for signs of resilience.
What the desk is arguing
The desk contends that the recent US government shutdown could lead to a weaker economic rebound due to possible non-payment of back wages to furloughed workers. Economists like Donovan traditionally minimize the long-term effects of such shutdowns, viewing them as net-neutral events where lost output is recouped post-resumption of government functions. However, variables such as potential job losses and a lack of promised back pay may weaken any anticipated recovery following the end of the shutdown, stressing the importance of consumer confidence.
Evidence supporting this view includes Donovan's observations on job security, suggesting that if furloughed workers don't receive back pay, their spending may plummet as they conserve resources in anticipation of harder financial times. This ripple effect can reduce overall economic activity, resulting in a more pronounced drag on growth than previously anticipated.
While the consensus often leans towards quick recovery post-shutdowns, the current landscape introduces uncertainties that could lead to an atypical outcome, fundamentally altering the traditional economic response.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Current US government shutdown could impact growth dynamics more than typically expected.
- 02Furloughed workers face potential non-payment of back wages, risking decreased consumer spending.
- 03Economic rebound traditionally seen after shutdowns is under threat from current uncertainties.
- 04Focus should be on economic data releases for indications of broader impact on growth.
Market implications
Traders should monitor USD/JPY for its sensitivity to shifts in US fiscal policy and consumer spending data amid the shutdown dilemma. Additionally, a solid economic data release may provide relief, while disappointing figures could exacerbate market volatility as concerns over a weaker recovery surface.
Risks to this view
The potential for the situation to improve hinges on the government’s resolution of the shutdown and results regarding back pay for furloughed workers. If back pay is not made available or if job losses escalate, the anticipated economic recovery from the shutdown could falter, invalidating the desk's current outlook.
Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Wednesday the 8th of October.
The US government shutdown continues. Economists are traditionally quite dismissive of the economic consequences of these events because the drag on growth in the near term is offset by a rebound in growth when government resumes. It is a moderate negative because government contractors do not get paid during a shutdown.
However, this give and take in economic activity depends on government workers getting paid back their back pay. If workers permanently lose their jobs in a shutdown, the rebound when government opens is less likely to offset the loss of activity during the shutdown. Similarly, if back pay is not paid, there will be less of a rebound.
US President Trump has signalled that some workers may not receive back pay. The legality of that will no doubt be challenged, but were it to be implemented, it would mute some of the growth rebound. It may also cause some further near term problems.
Furloughed government workers may be less inclined to spend out of precautionary savings if they will not have the means to rebuild those savings. Japan's August cash earnings data was weaker than expected, primarily because of weaker bonus payments. Regular pay is increasing in a more stable fashion.
Nonetheless, the data is likely to raise questions about the Bank of Japan's enthusiasm for raising interest rates in the very near term. Prime Minister presumptive Takaichi has focused on the sustainability of inflation and looked at wage growth in particular as a challenge to keeping inflation at the target level. German August industrial production data was quite a bit weaker than the consensus expectation and fell below the bottom of the consensus range.
This is however quite a volatile series. The reality often differs significantly from economic consensus, but today's miss is quite large even by the standards of this data series. As ever with German data it is also subject to quite sizeable revisions, roughly half of the time up, half of the time down so far this year.
Markets are not likely to get too worked up about this number therefore, but given the disruption to some aspects of trade and the more general pivot of consumers to favouring fun over goods, it is worth keeping an eye on. We do get some economic insight from the United States today with the Federal Reserve releasing the minutes of the last meeting, where most members went for a 25 basis point cut and Fed Governor Mirren dissented in favour of 50 basis points. It is unlikely there will be too many surprises in the minutes.
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