World Economic Prospects

US growth has already been held back this year by fiscal tightening (estimated at around 2% of GDP), but now faces potential further headwinds as a result of the current political dispute over the US government shutdown and raising of the debt ceiling. We estimate that for each week of shutdown, US (annualised) Q4 GDP growth will be cut by 0.1–0.15% Further fiscal tightening is also a risk. In case of no political agreement, if the US had to close the gap between spending and revenue this could mean spending cuts of over 5% of GDP – and even a compromise deal might involve some tightening. Even worse would be a US default, triggering major negative effects on global growth and financial stability. Our expectation is that a deal will be done to avert these very negative outcomes, and although shortterm T‐Bills have started to price the risk of default, we consider such an outcome unlikely. But the risk of some downward impact on US growth is non‐negligible, and a weaker US would also imply negative spillovers for other major economies, which have over the last month continued to show signs of improvement. This month sees our near‐term forecasts for Japan and the UK upgraded again, and Eurozone indicators have also strengthened gradually. For the emerging economies, the picture is more mixed. Chinese indicators have been sufficiently positive to warrant a slight upgrade in our GDP forecast for 2013, to 7.4% from 7.2%. But there has been no similar pick‐up in Brazil, India or Russia (with the latter two downgraded again this month). A downside shock to US growth would hurt emergers further. Exports would fall and global risk aversion rise, adding to downward pressure on currencies and upward pressure on inflation and interest rates – exacerbating the negative spiral of external pressure and pro‐cyclical policy seen since the summer.