The domino effect of the US government shutdown
The political stalemate in Washington that caused the US government shutdown has delayed the release of key economic data. From CPI inflation reports and housing data to labor market statistics and retail spending, all have been delayed.
This situation not only causes difficulties for policymakers in Washington, but also spreads instability to all corners of international financial markets.
Investors, businesses and central banks around the world are operating as if in a fog, as indicators measuring the health of the world’s largest economy suddenly disappear. The lack of accurate data has increased volatility, making decisions on investment, production and monetary policy risky.
In Europe and Asia, economists are trying to manipulate forecasts without the basis of US consumption and manufacturing data. “When you don’t have fundamental indicators of retail activity or inflation, you can’t be sure where the Federal Reserve is going,” said an analyst at a major London bank. “And when the Fed doesn’t have clarity, the entire world is forced to wait.”
This lack of data is especially pressing for the Federal Reserve. In a recent speech, Federal Reserve Chairman Jerome Powell emphasized that any decision on interest rates must be based on “the actual evolution of the economic outlook and the balance of risks.” The government shutdown has disrupted the supply of data, forcing the Federal Reserve to rely on unofficial indicators or outdated data, increasing the likelihood of monetary policy errors.
Data shortage puts pressure on the Fed
This lack of data is especially pressing for the United States Federal Reserve. In a recent speech, Fed Chair Jerome Powell emphasized that any interest rate decision must be based on “the actual evolution of the economic outlook and the balance of risks.” The US government shutdown has disrupted the supply of data, forcing the Fed to rely on unofficial indicators or outdated data, increasing the possibility of errors in the management of monetary policy.
As Michael Feroli, chief U.S. economist at JPMorgan Chase, puts it: “The Federal Reserve is leaning toward expansionary monetary policy because it fears the risk of a weakening labor market. But the lack of updated inflation data makes it difficult for him to accurately assess how much he needs to curb price increases. “This creates a vicious cycle: markets need data to act, but political uncertainty impedes the flow of that data.”
Multinational corporations with complex supply chains are also forced to postpone expansion plans or new investments because they cannot accurately predict American consumer spending in the coming quarters. This domino effect is slowing economic recovery in many developing countries, economies that rely heavily on demand for exports to the US market.
Tariff Restriction: A Surprising Bright Spot Amid Uncertainty
In contrast to the gloomy outlook caused by the US government shutdown, the International Monetary Fund (IMF) offers a glimmer of hope. In its recent World Economic Outlook report, the IMF slightly raised its global growth forecast, mainly due to a better-than-expected recovery in the US economy.
What is notable is that this optimism arises from an unexpected factor: restraint in retaliating against tariffs.
International Monetary Fund (IMF) Managing Director Kristalina Georgieva has publicly praised major economies for not responding firmly to the initial US tariffs. “The fact that trading partners have avoided the imposition of widespread retaliatory tariffs has been positive. “It has allowed global trade to continue flowing, avoiding a serious disruption to supply chains and a crisis of confidence,” Georgieva stated.
The global economy is currently walking a tightrope: on the one hand, there is technical recovery and moderation of trade rivals; On the other, there is the political risk that could trigger a full-blown trade war, erasing all the progress that has been made.
According to the IMF, this trade moderation has helped businesses and markets absorb tariff impacts, maintaining relative stability and supporting global growth. While geopolitical and trade tensions persist, the decision by major countries, especially China, not to retaliate has helped minimize economic damage.
Trade war between the United States and China
But that hope is overshadowed by the specter of a new trade war between the United States and China. Amid growing political tension, the threat of new US tariffs – even 100% on Chinese goods – threatens to upset the delicate balance that the IMF has just praised.
If this new round of tariffs occurs, especially if China decides to retaliate with proportionate measures, the consequences could be much more serious than before.
First, supply chain disruption: Global supply chains, already fragile after the pandemic, will be severely affected. Companies will face skyrocketing production costs and unpredictable delays, forcing them to abruptly disengage.
Second, rising inflation: The new tariffs will push up the prices of consumer goods and raw materials, exacerbating the inflationary pressures that the Federal Reserve is trying to contain. This could force central banks to tighten monetary policy again, increasing the risk of recession.
Third, trust has been broken: mutual retaliation will seriously undermine trust between the world’s two largest economies, leading to a contraction in cross-border investment flows and a riskier investment environment.
The IMF, although it raised its growth forecast, also issued a clear warning: “Uncertainty derived from trade measures remains a significant risk.” Global growth prospects, although revised upwards, remain low compared to historical averages and highly vulnerable to political shocks.
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