Flaherty sure U.S. gridlock will be cleared

Default would be unthinkable, minister says

OT TAWA • Finance Minister Jim Flaherty says he is “confident” the United States will resolve its political standoff over government spending and debt ceiling.

That’s because anything less than a quick resolution in the U.S. — the No. 1 economy — would be unthinkable, slamming the brakes on growth in other countries, as well.

At the very least, it could force a major recasting of world forecasts in the near term.

“Obviously, political gridlock in the U.S. is not good for the global economy or Can- ada,” Mr. Flaherty said Tuesday. “I am confident that U.S. leaders will reach an agreement and start really addressing high U.S. government debt levels.”

Mr. Flaherty’s comments came on the same day as the International Monetary Fund announced a recasting of its growth predictions — lowering its global economic outlook, as well as reducing growth forecasts for the U.S. and Canada.

The Washington-based IMF said in its quarterly World Economic Outlook that global expansion this year will be slower than expected, rising 2.9% from the 3.1% forecasts in its July report. For 2014, growth will pick up to a pace of 3.6%, although still below the previous estimate of 3.8%.

Canada’s economy is expected to grow 1.6% this year,

Gridlock in the U.S. is not good for the global

economy

the IMF said, down from the July forecast of 1.7%. The outlook for 2014 slipped to 2.2% from 2.3% previously.

The Bank of Canada is expected to pare its own projections for Canada — previously set at 1.8% this year and 2.7% in 2014 — in its quarterly Monetary Policy Report, to be released Oct. 23. On the same day, policymakers will announce their latest interest rate decision — although no change from the current level of 1% is expected by economists until the second half of 2014 — a timeline also supported by the IMF in Tuesday’s outlook.

“The balance of risks to Canada’s outlook is still tilted to the downside, emanating from the potential weaker external demand,” the IMF said.

Meanwhile, the IMF anticipates U.S. growth of 1.6% this year and 2.6% in 2014, down slightly from the July outlook.

The IMF said a U.S. debt default — which is still unlikely — would have a devastating impact on the world economy.

“The effects of any failure to repay the debt would be felt right away, leading to potentially major disruptions in financial markets, both in the United States and abroad,” said Olivier Blanchard, IMF chief economist.

“We see this as a tail risk, a low probability risk, but were it to happen it would have major consequences.”

Mr. Flaherty said government debt levels are “a real long-term problem for the U.S. and the global economy that needs to be tackled credibly.”

“Observing what’s going on now, I think Canadians appreciate having a strong government that has remained focused on the economy without this U.S.-style gridlock,” he said.

Mr. Flaherty is expected to deliver his fiscal update — a recalibrating of economic growth and revenue projections — some time after the Speech from the Throne on Oct. 16.