Chris White, Divisional Leader - Wealth Management
It was expected that the US political parties would wait until the last minute before reaching a deal to raise the countries debt ceiling to unprecedented heights, and so they did.
Whilst politically the outcome is likely to have many impacts, economically markets firstly took the expected decision mostly in stride - that was before rating agencies downgraded the US debt rating from AAA, causing global market turmoil. What does the debt deal and rating downgrade mean for the future of the US economy and in turn investment markets globally?
The world continues, however concerns remain
In the short term the first obvious benefit was that the US government avoided defaulting on its debt obligations, keeping ownership of the banner for now. However larger macro issues continue to impact the US economy, most notably sluggish growth and employment.
In order to avoid dipping into recession again, the US needs to show considerable economic growth that will translate into jobs. The agreement reached by the President in order to raise the debt ceiling however is unlikely to help on this front.
Republicans have successfully lobbied for and received a number of measures that mean the US government will become focused on cutting spending, unless revenue grows. However, with the the Bush era tax cuts Obama extended in December, and fiscal package II complete, revenue growth will be far more difficult for the government to stimulate. And US corporations do not see the need to invest due to the low consumer sentiment and increased savings rate.
On top of this, employment growth continues to be weak, despite the healthy position of US corporate (76% have reported positive earnings surprises this season so far this year). The efficiencies that have been realised during the downturn mean that not all of those jobs are coming back. This was experienced in the US after the 2000/2001 downturn as well, and current employment growth is matching that recovery.
Where to from here?
How big is the future debt of the US? A range of reports since the agreement have attempted to explain the mammoth proportions that the debt will reach. There was also a quirky report about the company Apple having more cash on hand then the US government ($US74 billion in treasury compared to Apple's $US76 billion). The chart to the left compares the G7 countries net debt and forecast through 2016.
The strong profits of US companies however correlates strongly to increasing share prices over time - after all, return on each dollar invested is the key fundamental for investment in the first place. Economists worldwide continue to expect the US to muddle through their current economic struggles and eventually rebound. The governments ability to control its spending and rising debt will continue to be a topic of contention, especially as the US heads into its next election period in 2012.
