US Government Shutdown Casts Shadow on Global Economy: Impact on Monetary Policy Decisions

US Government Shutdown's Impact on the Global Economy

Imagine trying to drive a car on a dark night without headlights. That's the situation economic policymakers around the world are facing right now, thanks to the U.S. government shutdown that has disrupted the flow of official economic data. This data, vital for understanding the performance of the world's largest economy, is essential for making informed decisions about monetary and trade policies.

A New Global Headache

For countries like Japan, U.S. data acts as a compass for charting domestic policies. It helps assess the strength of the Japanese yen, trade performance, and inflation expectations. When this compass stops working, it becomes extremely difficult to navigate the economy. Haruhiko Kuroda, the Governor of the Bank of Japan, stated in a recent press conference that this is a "serious problem," highlighting the challenges the central bank faces in determining when to resume raising interest rates.

A Global System at Risk?

The concern isn't just about economic data. It also extends to confidence in U.S. institutions. Karen Mann, a member of the Bank of England's Monetary Policy Committee, suggests that changes in trade policy and the controversy surrounding the Federal Reserve's independence could have an indirect impact on monetary policy in the UK.

Increased Risks and Tougher Decisions

Finance and economic leaders from around the world are meeting in Washington for the World Bank and International Monetary Fund meetings. The fallout from the U.S. government shutdown on the global economy will likely dominate discussions. The IMF has warned that political pressure on political institutions could undermine confidence in their ability to perform their mission. The IMF pointed out that pressure on institutions charged with collecting and publishing data could damage confidence in official statistics, making it harder for central banks and policymakers to do their jobs.

Searching for Alternative Solutions

While official data may be limited, policymakers still have access to alternative sources. The Federal Reserve, which is self-funded and independent of the government, conducts its own surveys. Data is also available from the private sector. However, integrating these alternative sources into a coherent view presents a challenge. Adam Posen, president of the Peterson Institute for International Economics and a former Bank of England official, emphasized that monthly U.S. data is not the deciding factor for other central banks. However, he noted that the government shutdown and disruptions at the Bureau of Labor Statistics are increasing doubts about American governance and reliability.

Uncertainty Dominates the Scene

While last spring was filled with uncertainty about President Trump's protectionist trade policies, the focus now is on how companies, countries and consumers are coping with the new economic landscape. So far, the impact has been less severe than initially expected, but adjustments are still underway. However, with a significant gap in the flow of data covering nearly a quarter of global economic output, the future becomes increasingly uncertain as the government shutdown continues. Robert Kahn, global head of macroeconomics at Eurasia Group, emphasized that there is plenty of information available, but how to integrate it and how the markets will respond remains unknown. Over time, uncertainty accumulates and the risk of error increases.