The US economy can weather the drastic spending cuts known as the sequester if they are short-lived, ratings firm Standard & Poor’s (S&P) said on Friday.
S&P said the cuts, as well as a potential government shutdown at the end of this month because of 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 US$85 billion in spending cuts over the next seven months went into effect on Friday.
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,” it said.
US President Barack Obama’s administration also estimated the economy, which barely grew in the fourth quarter of last year, would take a 0.5 percentage point hit this year if the cuts were fully implemented.
S&P projected if the sequester was not modified, it would bring annual growth down to about 2 percent, below its current forecast of 2.7 percent.
It estimated the risk of the US falling back into recession between 10 percent and 15 percent, lower than the 15 to 20 percent chance the economy would make a quick turnaround.
S&P expressed concern about the 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.
S&P made no mention of another US credit rating downgrade in the statement.
In August 2011, it stripped the US of its coveted “AAA” rating, citing the bitter political battle over raising the country’s borrowing limit that was pushing the world’s biggest economy to the brink of default.
The agreement in Congress to raise the debt ceiling spawned the sequester spending cuts, designed to be so drastic in hopes they would push the Democrats and Republicans to find a budget deficit-reduction compromise to avert them.