US spending cuts loom over global recovery

The global economic recovery will slow this year unless the US averts $85bn (£56bn) in spending cuts that start today, the International Monetary Fund has said.
The warning comes amid gridlock in Washington over whether to delay a series of cuts that will hit everything from America’s schools to its air traffic control system.

The squeeze in spending – known in the US as the sequestration – is the latest battleground between President Barack Obama and Republicans over how to tackle the country’s more than $16 trillion debt.

“Everybody is assuming that sequestration is going to take effect,” a spokesman for the IMF said on Thursday . “What it means is that we are going to have to re-evaluate our growth forecasts for the United States and other forecasts.”

The US economy will be the hardest hit, with the reductions shaving at least half a percentage off growth this year. In its latest forecasts published in January, the fund predicted US expansion at just under 2pc this year and forecast global growth of 3.2pc.

With Europe’s debt crisis flaring again, financial markets and governments are hoping that the White House and Congress can find a way of introducing austerity without choking off a recovery in the world’s largest economy.
The cuts loom as revised figures yesterday showed that the US economy grew 0.1pc last quarter, up from an initial estimate that it contracted 0.1pc.

The $85bn is the first instalment of a planned $1.2 trillion in cuts in US government spending over the next decade. Half of the total will fall on defence spending and the rest will be distributed amongst other departments.

The arbitrary nature of the cuts was designed last August as a stick to force the bitterly divided Republicans and Democrats to agree to a more comprehensive debt deal. But politicians failed to reach a deal by the end of last year and, with less than 24 hours to go, appear unlikely to again.

Stock markets have been relatively sanguine about the prospect so far, but economists say that may change once the potential impact on the US economy is digested.

IHS Global Insight expects the cuts to result in 400,000 jobs losses and provide the recovery with its stiffest headwind this year.