Analyst quantifies effects of US government shutdown on GDP, chems

HOUSTON (ICIS)–For every week the US government is shut down, quarterly GDP growth is reduced by 10-20 basis points, a drag that also hits the chemical sectors in the US and the EU, an analyst with Jefferies said late on Sunday.

Annually, the effect on GDP is about 5 basis points, said Laurence Alexander, an analyst for the investment bank Jefferies. He made this comment in a research note.

Once ripple effects, direct effects and indirect effects are taken into account, each month of the shutdown will have a 0.11% effect on 2019 sales for the US and EU chemical sector, he said.

The effect will be 0.21% of 2019 earnings before interest, tax, depreciation and amortisation (EBITDA), Alexander said. On free cash flow, the effect is 0.9%.

Demand for chemicals typically rises and falls at multiples of GDP, with the magnitude depending on the position of the product on the value chain, Alexander said. The multiple could be anywhere from 1.2x for downstream chemicals such as paints and adhesives to more than 2.0x for upstream chemical building blocks.

A slowdown in the US also spreads to other countries around the world, Alexander said. It affects key exporters such as Canada and Mexico. Chinese exporters need to factor in the shutdown with the ongoing trade dispute between their country and the US – all while planning for the Lunar New Year.

If the shutdown extends into the second quarter, then it would likely distort other parts of the economy.

For example, about 40,000 house sales/month would be stalled by the inability to secure federal flood-insurance approvals, said Alexander, who was quoting figures from the National Association of Realtors (NAR). Other economic indicators that could be affected by the downturn include unemployment, consumer credit quality and bank-lending standards.

All of these would affect the data used to predict the likelihood of a recession, Alexander said.

For Jefferies, if the shutdown lasts for more than two months, more than half of the bank’s preferred recession indicators would be flagged by the third quarter of this year, pointing to a significant risk of a recession in 2020, he said.

The US government partially shut down on 22 December.