Progress on U.S. Debt Ceiling Agreement as White House and Republicans Seek Consensus
As the House of Representatives adjourns for the Memorial Day weekend, preliminary progress is reported on a deal to raise the national debt ceiling. The White House and leading Republicans are negotiating to determine government spending levels.
The proposed two-year spending deal under consideration would extend the debt ceiling past the 2024 elections. It would include an increase in funding for the military and veterans while limiting federal spending.
The clock is ticking to pass the deal before the June 1 deadline to prevent potential shortfalls in the government's ability to pay its bills. However, reaching this deadline is becoming increasingly uncertain without a firm deal.
Both President Biden and House Speaker Kevin McCarthy confirmed that they're engaged in productive discussions but no agreement is yet in place. The debate is also surrounding a proposal to roll back some of the $80 billion earmarked for IRS expansion last year.
Treasury Secretary Janet Yellen warned of a potential default on U.S. obligations as early as June 1 if no action is taken. Wall Street, in response, is making contingency plans for trading U.S. Treasurys even in the event of a default. Amid these tensions, Fitch Ratings has placed the U.S. triple-A credit rating on "rating watch negative".
A major sticking point in the negotiations is agreeing on a cap for spending in the coming years. Republicans seek reduced spending, particularly advocating for rolling back discretionary spending to 2022 fiscal year levels. Democrats counter that this would lead to significant cuts in crucial domestic programs.
In this backdrop, progress towards a deal is being closely watched, not just in the political corridors, but also on Wall Street and among credit rating agencies.
Recession Hits Germany, Casting a Shadow Over Europe’s Economy
Germany, Europe's largest economy, entered a technical recession in the first quarter of the year. With two consecutive quarters of economic contraction, primarily due to households reducing spending amidst high food and energy prices, there are concerns that the eurozone may have also experienced a contraction.
Despite this downturn not significantly changing economists' immediate forecasts, a potential eurozone recession could dampen the optimism that has recently surrounded the region's economic outlook. This development may also induce caution among the European Central Bank (ECB) policymakers as they plan further interest rate hikes.
Germany's statistics agency reported a 0.3% decrease in the country's GDP during the first three months of the year. The main reason behind this contraction was identified as a 1.2% fall in household consumption, as the rise in food prices led to reduced spending power. Notably, German households found themselves paying 21.2% more for food compared to the previous year.
In the aftermath of the Ukraine conflict, economists had warned about a potential recession in Germany due to the country's dependence on Russian natural gas. Although initially it seemed like Germany would escape recession, the revised figures confirmed the downturn, albeit less severe than initially feared.
Current business surveys suggest a potential return to growth in Germany during the second quarter. However, the impact of increased borrowing costs and sluggish expansion in its major export markets could lead to another contraction later this year.
If GDP growth estimates for other eurozone countries remain unchanged, the new GDP measure for Germany implies a slight contraction in the eurozone's economy during the first quarter. This change could influence the ECB's future interest rate decisions, given its recent growth forecasts that now seem excessively optimistic.
The ECB had raised their growth forecasts for the present year and beyond in March, a move motivated by a view of the eurozone economy that, in light of current data, may have been too optimistic. If this new economic measure holds true, it could potentially prompt the ECB to reconsider its projections and future actions.
Adapted from WSJ, Reuters, CNBC, NYT