As demographics age in developed countries, the pandemic has shrunk the pool of available workers and forced older workers to retire. In the US (but not in Australia), the labor force participation rate of older workers and women is declining.
With inflation near double digits in the US (9.1%), Europe (8.6% and rising) and the UK (9.4%), and the Australian central bank heading towards 8%, central banks are available demand that it be more aligned with the declining supply using the only tools available: higher interest rates and tighter credit terms.
They are trying to burn off excessive inflation, even killing economic growth in the process.
The recent sharp drop in gasoline prices may provide some easing in US headline rates when the latest US inflation data is released in the US this Wednesday.
Oil prices have fallen from over $120 a barrel just two months ago to $94 a barrel today. This is part of a rational demand-side response to the sharp rise in fuel costs, but it is also a flow from the slowdown in global economic activity. Other major commodity prices – metals and agricultural commodities – also fell after the material surge.
However, US core inflation, which excludes fuel and food costs, is expected to continue rising and could even rise. It’s the rate, not the headline rate, that guides the central bank’s reaction.
The International Monetary Fund last month cut its global economic growth forecast to 3.2%. Last year, the global economy grew her 6.1%. The war in Ukraine and China’s roiled coronavirus-affected economy are the main drivers of the contraction in growth.
Rapidly rising interest rates and tightening credit conditions as major central banks withdraw quantitative easing programs that have injected about $12 trillion into the global financial system in response to the pandemic will also impact growth, It threatens the stability of some overindebted countries. Developing country.
Interest rates in advanced economies will rise further as central banks decide to keep inflation under control. Currently in the 2.25% to 2.5% range, doing more damage to economic growth.
The U.S. yield curve is now as inverted as it has been for decades, with the yield spread between the 2-year note (3.25%) and the 10-year note (2.83%) currently around 42 basis points. Bond investors are typically compensated for the risk of holding longer-duration securities with higher yields, but every U.S. recession since the 1970s was preceded by an inversion of the curve.
So no matter how strong underlying conditions in economies like the US and Australia are, central banks are trying to halt growth and raise unemployment to better balance supply and demand.
Reconciling an economy that is creating jobs faster than it is creating jobs and demand for travel, cars and goods is outstripping supply with data suggesting the economy is shrinking or slowing It Is difficult.
As prominent market economist Mohamed El Elian told Bloomberg after Friday’s U.S. jobs report, the Fed and its allies need to “break it down somehow” to keep inflation under control. prize. Perhaps that’s a bit strong, but it’s certainly true that we’ll have to risk policy overreach and a nasty recession to keep inflation in check.
While a “soft landing” is the objective, it is difficult to design with the crude tools central banks have at hand, and economic and geopolitical conditions are likely to vary from past responses and pre-pandemic. is very different from that of
The decoupling of major economies and the redesign of global supply chains (regression of globalization), along with rising geopolitical tensions, are changes in China, the economy that underpinned much of the world’s growth in recent decades. .
China’s population is aging, the economy’s cost base is rising, and increasingly aggressive geopolitics are straining relations with the West.
The post-pandemic global economy that ultimately emerges will look different than it did entering 2020. Rising costs of new supply chains and poor economic and social integration will drive up input costs and prices, weighing on growth. Pour fiscal stimulus into the economy in response to the pandemic and pursue contractionary policies to repair the economy.
This is a rather strange but very important period in economic history.