S&P warns of dire impact on U.S. economy from any shutdown, default

NEW YORK (Reuters) - Standard & Poor’s warned on Wednesday of grim consequences for the U.S. economy if the White House and lawmakers fail to reach a deal to keep the government open and avert a default.

The likelihood of either outcome, however, remains slim, with the urgency to address massive damage from Tropical Storm Harvey, the most powerful storm to hit Texas in over 50 years, further reducing the chances, according to the rating agency.

A default would be worse than the collapse of Lehman Brothers in 2008 at the height of the 2007-2009 global credit crisis, Standard & Poor’s U.S. chief economist Beth Ann Bovino said.

“The economy would fall back into a recession, wiping out much of the progress made by the recovery,” Bovino wrote in a report titled “With A Shutdown, There Will Be Blood.”

A government shutdown, while less devastating than a default, would still harm the economy.

Closure of federal operations, if it were to happen at the start of the fourth quarter, would subtract 0.2 percentage point or at least $6.5 billion from gross domestic product each week it drags on, Bovino said.

“A disruption in government spending means no government paychecks to spend at the mall, lost business and revenue to private contractors, lost sales at retail shops, particularly those that circle now-closed national parks, and less tax revenue for Uncle Sam,” she said.

Bovino and economists at some top Wall Street banks expect Congress to come up with a budget plan and a vote to raise the government’s legal borrowing limit, currently at $19.9 trillion, when lawmakers return to work on Sept. 5.

“But betting on a rational U.S. government can be risky,” Bovino said.

Last week, President Donald Trump at a rally in Phoenix threatened to veto a spending bill from Congress if it does not contain money to begin building a wall along the border between Mexico and the United States, which he promised during his election campaign.

Reporting by Richard Leong; Editing by James Dalgleish