Aging demographics in developed economies have led to a pandemic-accelerated shrinkage of available labor pools as older workers retire. In the United States (but not Australia), participation rates for older workers and women have fallen.
With inflation approaching double-digit levels in the US (9.1%), Europe (8.6% and rising) and the UK (9.4%) and approaching 8% in Australia, central bankers are trying to engineer demand reduction to bring it more in line with supply reduction using the only tools at their disposal – higher interest rates and tighter credit conditions.
They try to burn off excessive inflation even if they kill economic growth in the process.
When the latest US inflation data is released in the US on Wednesday, it is likely to show some moderation in the US headline rate, driven by a recent sharp drop in gasoline prices.
The price of oil, which was above $120 a barrel just two months ago, has now fallen to around $94 a barrel. This is partly a rational demand response to the sharp increase in fuel prices, but also the slowdown in global economic activity. Prices of other key commodities – metals and agricultural products – also fell after material spikes.
Core US inflation, which excludes fuel and food costs, is however expected to remain high and could even rise. It is this rate, rather than the headline rate, that guides central bank reactions.
Last month, the International Monetary Fund lowered its global growth forecast to 3.2%. Last year, the global economy grew by 6.1%. The war in Ukraine and the sluggish Chinese economy, affected by the COVID, are the main contributors to the contraction in the growth rate.
Rapidly rising interest rates and tightening credit conditions as major central banks roll back quantitative easing programs that injected an estimated US$12 trillion into the global financial system in response to the pandemic, will have will also have an impact on growth and will threaten the stability of certain over-indebted countries. Developing economies.
With central bankers determined to get inflation under control, interest rates in developed economies will rise further – the US bond market is signaling a fed funds rate of between 3.5% and 4% by March this year. next year from the current range of 2.25% to 2.5% – and do far more harm to economic growth rates.
The US yield curve is now as inverted as it has been for decades, with the difference between the yield on two-year bonds (3.25%) and 10-year bonds (2.83%) now around 42 basis points. Curve inversions — normally bond investors are compensated with higher yields for the risks of holding longer-dated securities — have preceded every U.S. recession since the 1970s.
So no matter how strong underlying conditions are in economies like the US or Australia, central bankers will stifle any growth and force unemployment to rise to rebalance the supply-demand equation.
It is difficult to reconcile economies that are creating jobs faster than they can fill them and in which the demand for travel, cars and goods is overwhelming, with data that suggests economies are shrinking or slowing down.
As renowned market economist Mohamed El-Erian told Bloomberg after Friday’s US jobs report, the Fed and its peers are going to have to “somehow break” their economies to controlling inflation. That might be a little strong, but they’re definitely going to have to risk over-policing and bad recessions to get their inflation rates under control.
“Soft landings” are the goal, but they are difficult to engineer with the rudimentary tools available to central bankers and under very different economic and geopolitical circumstances than they have reacted to in the past or pre-pandemic. .
Along with heightened geopolitical tensions, the decoupling of major economies and the reshaping of global supply chains – the rollback of globalization – it is changes in China and in an economy that have fueled much of the growth world in recent decades.
China’s population is aging, its economy’s cost base has grown, and its increasingly assertive geopolitics has generated heightened tensions in its relationship with the West.
The post-pandemic global economy that will eventually emerge will be different from the one that entered 2020, with the costs of new supply chains rising and with less integration of economies and societies increasing input costs and prices. and weighing heavily on growth even as governments that showered their economies with fiscal stimulus in response to the pandemic to pursue restrictive policies to clean up their finances.
This is a very important, if rather strange, period in economic history.