UCLA Anderson Forecast says war in Ukraine, COVID lockdowns in China, inflation will stymie growth, reports Yahoo News.
According to the UCLA Anderson Forecast, a number of economic impediments — including the Russia–Ukraine war, COVID-19 lockdowns in China, supply chain constraints and inflation — continue to affect the U.S. and California economies. And while there is no recession forecast in the June report, economic slowdowns nationally and statewide are expected.
The national forecast
Given growing concern about the possibility of a recession caused by rising interest rates and a slowdown in housing, Professor Edward Leamer, in an article titled “A New Way of Forecasting a Recession: Not Much to Worry About Right Now,” conducts a statistical analysis of past recessions. He concludes that a recession in the next 12 months is unlikely.
However, according to UCLA Anderson Forecast Senior Economist Leo Feler, author of the national forecast, there is no doubt that parts of the U.S. economy are abruptly slowing, as waves of economic shocks continue to cause damage. With the war in Ukraine and China’s COVID-19 lockdowns continuing, the global economy continues to experience supply constraints and higher prices for raw materials.
Related to those shocks, what once seemed like transitory inflation has become persistent, and consumers have begun to expect higher rates of inflation in the coming years. In other words, the concern that inflation expectations could become unanchored has begun to materialize, which will make it more challenging for the Federal Reserve to rein in inflation. The Forecast expects that the Fed will significantly increase interest rates this year, which will slow consumer demand, especially for housing and related consumer durables. Higher rates will also slow business investment.
The slowdown in both consumer spending and business investment should bring demand back in line with supply and help alleviate some of the current supply chain constraints and shortages. Although a recession is not expected in the next two years, the risk for one has certainly grown. It is possible that continued global economic shocks will hurt the U.S. economic recovery and that the Fed will tighten too quickly, which could lead to a recession.
The Forecast team also does not expect the Fed to be able to bring core inflation down to its 2% target until after 2024, even with the tighter monetary policy that is expected for this year and into 2023.
The Forecast team also does not expect the Fed to be able to bring core inflation down to its 2% target until after 2024, even with the tighter monetary policy that is expected for this year and into 2023.
Economic growth to dip
The June Forecast expects U.S. economic growth will likely slow to 2.8% in 2022, followed by 2.0% in 2023 and 1.9% in 2024. Just a few months ago, the forecast was for growth of 4.3%, 2.8% and 2.3%, respectively, for the same years. On a quarterly basis, the Forecast expects the depth of the economic slowdown and the highest risk of recession to occur in the middle of 2023.
According to Feler’s report, the GDP contraction that occurred in the first quarter of 2022 was a “one-off.” He expects a rebound in GDP of 3.1% on an annualized basis in the second quarter and 3.6% in the third quarter, as consumers shrug off COVID-19 and shift back to services like airline travel, recreation and dining.
“By the end of 2022 and into 2023, as the impact of the Federal Reserve’s interest rate increases begin to bite, we expect growth to slow to below 2%,” Feler writes. “Only by the end of 2024 do we expect GDP growth to pick back up to trend rates.”
With that economic slowdown, the level of GDP is expected to remain below what it would have been had the pandemic never occurred. That is, real GDP is not expected to return to its long-term trend even by the end of 2024. Unemployment will likely rise in 2023 as the Fed increases interest rates and the economy slows. The forecast for inflation does not see consumer prices easing any time soon and calls for 7.4% year-over-year inflation, as measured by the consumer price index, by the end of 2022, falling to 2.2% by the end of 2023.
Feler expects the Fed to raise interest rates at each of its meetings for the rest of the year, with the likelihood of 0.5 percentage-point increases in June and July, and even the possibility of a 0.75 percentage-point increase if inflation does not begin to come down. The forecast expects the federal funds rate to peak between 3.75% and 4.0% in mid-2023.
Did you subscribe to our daily Newsletter?
It’s Free! Click here to Subscribe
Source: Yahoo
