Ruchir Sharma, chairman of Rockefeller International and a highly respected economist, paints a not-so-flattering picture on a Monday morning.
He ends his letter on Monday with these words:
While the next contraction may take longer And it will likely take on an unfamiliar shape, perhaps not much deeper but more permanent, as firmer inflation forces central banks and government bailouts to the sidelines.”
“The world is not ready to move on.”
why is that?
Well, Mr. Sharma goes back to the asset bubble created by the Federal Reserve.
“In 2020, governments put so much money into the economy that consumers are still spending way too much time in the last two years.”
“Investment by US and European companies hardly broke its stride.”
Governments continue to spend.
Because of this, the next downturn may come Later than expected….”
“When the pandemic stimulus finally ends by the end of the year, the next downturn, once it does, may not pass so quickly.”
“The main sticking point is inflation.”
The world has changed.
The “new” normal of the Phillips curve might be an inflation rate of 4.0 percent, not 2.0 percent.
All sorts of things happen to cause this change, all of which hurt the “supply-side” economy.
Increased demand, higher government spending and easier monetary policy will not help the ’employment’ situation.
There appears to be a structural shift taking place.
“One in eight people say they plan ‘no return’ to pre-pandemic activities, including work.”
“The number of hours that people of all ages are willing to work has decreased, and their attitude has changed as well.”
“Birth rates have been declining for years, but now they are rapidly shrinking in the working-age population.”
“Countries are retreating inward.”
Let me say again, many things that happen to the economy hit the supply side of the equation.
Greater efforts to stimulate demand will affect prices more than they will affect production.
2022 GDP result
The American economy ended up producing a rate of growth greater than most people could have expected.
The Federal Reserve believes that the 2022 outcome of economic growth may see the US economy Coming here by 0.5 percent on an annual basis.
Instead, the annualized performance was 1.0%.
Yes, 1 percent isn’t a very strong growth rate, but it was more growth than expected.
This is consistent with Mr. Sharma’s account of the performance of the US economy.
The Fed envisioned that 2023 would bring about a growth rate of 0.5 percent year on year.
No obvious recession, but certainly not a growth rate that you can brag about too much.
But this is a major part of the point Mr. Sharma is trying to make.
A “supply-side” economic slowdown will not be as dramatic as in the past, unemployment rates will remain higher than expected while labor force participation will remain lower than before, and other statistics on the economy will provide very mixed results.
The economy is undergoing a transformation, and as a result, the markets will not function as they did in the past.
In other words, we must change what we expect to happen over the next year or two.
“The global economy is heading towards a period not seen in decades.”
In this period we have two political battles going on, almost independently of each other.
The Fed is in the middle of a period of quantitative tightening.
The American economy has never experienced anything like this.
The Federal Reserve reduces its stock portfolio on a regular basis, regardless of what’s going on in the economy. The policy has been in place since March 2022, and the Fed plans to continue the policy at least through 2023.
Second, the federal government is in a fight over raising the debt ceiling. This battle could continue through June, and although both sides of the debate will finally agree on a “new” debt limit, it’s not entirely clear, at this time, what that outcome could be.
The guess now is that there will be some general reduction in the size of the deficit in the future.
But, if, as explained above, the problem is on the ‘supply side’ of the economy, little or nothing will happen to improve the situation surrounding inflation.
The federal government will still drive the economy on the demand side, and the central bank will still reduce demand by shrinking its balance sheet.
Not really the medicine suggested by Mr. Sharma.
This leaves us without much optimism about finding a path to reduce inflation and return the economy to a path of stable and productive growth.
state of things
The US economy is in real trouble.
The “credit inflation” that lasted from the 1980s to 2020 created an environment in which asset price inflation was tolerated while consumer price inflation was not.
Then we got the “pandemic” period, from 2020 to 2022, where the economy experienced more imbalance during the epidemic period, supply disruption period, asset bubble period, and so on.
We are now on the other side of the bubble, but the various situations where there was an imbalance in the market have not been resolved. There is still plenty of economic turmoil left.
This is what Mr. Sharma is referring to when he says that “the world is not ready to go on for long”.
We have to rethink where we are and adjust what we are trying to do to restore stability and growth.
However, that does not seem to be the path to be taken as we navigate the debates and debates that confront us on the horizon.