Organisation for Economic Co-operation and Development Secretary-General Angel Gurria said the political deadlock in the United States "Is needlessly putting at risk the stability and growth not only of the U.S. but also the world economy."
Gurria added, "This comes at a time when a fragile recovery in advanced economies was underway, and when a number of emerging economies were already facing new risks. We still see the probability of failing to raise the debt ceiling as low, but as the government shutdown drags on, the level of concern is ratcheting up. If the debt ceiling is not raised -- or, better still, abolished -- our calculations suggest that the OECD region as a whole will be pushed back into recession next year, and emerging economies will experience a sharp slowdown. The magnitude of further possible negative feedback effects can only be guessed at."
OECD currently has 34 member countries.
Gurria said the U.S. sequester has "already resulted in a large and arbitrary fiscal consolidation, and this is now being compounded by the shutdown. But the consequences of failing to raise the debt ceiling would be much worse." He predicted that government consumption would have to shrink immediately by at least 4 percentage points of GDP, and would impacts 2014 GDP by a similar amount.
He added that a default on government debt would be even more serious. "Even if the likelihood of this is low, just the uncertainty about the government's ability to avoid a default on part of its debt would result in disruptions in financial markets that would deepen the economic downturn, lowering tax revenues and forcing more cuts in public spending. We would also expect to see serious stresses in the banking system at a time when the federal government would not be able to offer emergency assistance. Unemployment would rise back to levels seen in the wake of the financial crisis."
He also noted that other countries would be severely affected. "The U.S. would reduce its imports from the rest of the world, and higher U.S. bond yields and lower asset prices would feed through to other markets, tightening financial conditions. Confidence would take a sharp hit virtually everywhere. Moreover, putting the world's primary risk-free asset into doubt would have negative repercussions throughout the global financial system."
And, he said, "These effects would of course feed back on the U.S. economy."
OECD member countries are:
* Czech Republic
* New Zealand
* Slovak Republic
* United Kingdom
* United States
to Daily News