The combination of high inflation, expensive energy and Omicron is a gloomy one for global growth, and the outlook is darkening
Save time by listening to our audio articles as you multitaskIt is a gloomy combination for global growth, and the outlook is darkening. Several economies could even suffer recessions, though at different times depending on the obstacles they face.
The economy in the United States is overheating. The annual rate of consumer-price inflation is 7.9% and hourly wages are 5.6% higher than they were a year ago. America has nearly twice as many job openings as it does unemployed workers—the highest ratio in 70 years. For much of 2021 central bankers hoped that Americans who left the labour force after the pandemic struck would return, helping cool the labour market.
The Fed needs both wage and price growth to cool if it is to hit its 2% inflation target. It is expected to raise short-term interest rates, which started the year below 0.25%, to over 2.5% by December, and to continue to raise rates above 3% in 2023. This week the central bank trailed a plan to shrink its $8.5trn bond holdings, starting in May, at a much faster pace than during the last period of “Hitting the monetary brakes, though necessary, endangers growth.
Europe has an inflation problem, too, but it is so far caused by expensive imported energy and food more than by overheating. Russia’s invasion of Ukraine and Western sanctions threaten the continent’s energy supply. Gas prices for next winter are five times higher than in America, and spending on household energy is almost twice as high as a share of. As energy prices have surged, consumer confidence has slumped. Firms are struggling, too: French industrial production fell in February.
The euro area’s economy will probably still grow in 2022 as a whole. But it looks fragile. Should Europe stop importing Russian gas—whether because it chooses to or the Kremlin decides to cut off the supply—the danger of a recession will rise.
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