US govt shutdown bad news for Canadian economy at ‘tipping point’

Video: U.S. government heads towards shutdown that could affect economic recovery. Eric Sorensend & Mike Drolet report.

Canada’s chief central banker may be right about the economy arriving at a “tipping point,” but if a shutdown in Washington takes effect – and there’s little to suggest it won’t at this point – the direction it takes won’t be the one he was talking about.

The tipping point Stephen Poloz is hoping the country has arrived at is a shift within the economy from household consumption to exports, driven by demand from an awakening U.S. market place.

The shift risks being reversed, however, by the so-called partial shutdown of the U.S. federal government at 12:01 a.m. Tuesday, experts say.

Read more: As US recovery blossoms, Canada’s economic hopes pinned to exports

If an impasse between U.S. Republicans and Democrats persists through that deadline, roughly one million “non-essential” U.S. federal employees will be sent home (it’s unclear whether they’ll continue to be paid), while hundreds of millions of dollars will be pulled immediately from the economy as Washington puts dozens of services and program on hiatus.

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Experts suggest the U.S. economy will start slowing soon after the shutdown. If days stretch into weeks and weeks into months, what has been the strongest period of economic growth within the world’s biggest economy since the Great Recession ended risks reverting into another downturn, experts are warning.

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Mark Zandi, chief economist for Moody’s Analytics estimates that a shutdown spanning a few days will cut 0.2 per cent off fourth quarter growth. A month-long shutdown would cut 1.4 percentage points.

Any stalemate longer than two months “would likely precipitate another recession,” Moody’s said.

“It now seems to be a matter of how long the shutdown will last,” Michael Gregory, economist at BMO Capital Markets said.

As Canada’s largest trading partner — by a wide margin at that — a slowdown in the U.S. economy would ripple into sectors and companies the Bank of Canada says will be required to prop up the domestic economy as consumers dig themselves out from under record debt levels.

The press secretary for Finance Minister Jim Flaherty said in a statement Ottawa “is working to ensure the free flow of trade, goods and passengers to protect Canada’s economic interest.”

“The budget impasse is a reminder that while Canada’s economy remains strong, we are still vulnerable to uncertainties outside of our borders, especially in the US and Europe,” Marie Prentice, press secretary for the minister said.

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The latest episode of political brinkmanship in Washington also risks putting a damper on business spending intentions in Canada and elsewhere, Scotiabank said in a note Monday.

“The unfortunate casualty is once again going to be the private sector economy,” Scotia economists Derek Holt and Dov Zigler said.

— With a file from Bryan Mullan in Ottawa

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