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Ruchir Sharma, Chairman of Rockefeller International, a very respected economist, is not painting us a very cheerful picture this Monday morning.
He concludes his Monday message with these words:
“While the next downturn may take longer to hit, it is likely to take an unfamiliar shape, possibly not much deeper but more enduring, as stickier inflation forces central banks and government rescue teams to the sidelines.”
And,
“The world is not ready for the long grind ahead.”
Why is that?
Well, Mr. Sharma goes back to the asset bubble created by the Federal Reserve.
“In 2020, governments injected so much money into the economy that consumers are still sitting on much of its two years on.”
“Investment by U.S. and European business barely broke stride.”
“Governments continue to spend.”
“Because of this, the next downturn may come later than expected….”
“When the pandemic stimulus finally runs out by year-end, the next downturn, once it comes, may not pass so quickly.”
“The key sticking point is inflation.”
The world has changed.
The “new” normal for the Phillips Curve may be a rate of inflation of 4.0 percent, not 2.0 percent.
All sorts of things are happening to cause this change, and they are all hitting the “supply side” economy.
Greater demand, greater government spending, and an easier monetary policy will not help the “labor” situation.
There seems to be a structural shift going on.
“One in eight people say they plan ‘no return’ to pre-pandemic activities, including work.”
“The number of hours people of all ages want to work plunged, and their attitude has changed as well.”
“Birth rates have been falling for years, but are now rapidly shrinking working-age populations.”
“Countries are retreating inward.”
Let me just say once again, many of the things that are happening to the economy are hitting the supply side of the equation.
And, greater efforts to stimulate demand are going to impact prices more than they will impact output.
2022 GDP Result
The U.S. economy ended up producing a greater rate of growth than most people were expecting.
The Federal Reserve believed that the 2022 result for economic growth might see the U.S. economy coming in with a 0.5 percent, year-over-year, performance.
Instead, the year-over-year performance was 1.0 percent.
Yes, 1.0 percent is not a very strong rate of growth, but it was a greater rate of growth than had been expected.
This is consistent with Mr. Sharma’s narrative about how the U.S. economy is doing.
The Federal Reserve pictured 2023 coming in with another 0.5 percent, year-over-year, rate of growth.
No apparent recession, but certainly not a rate of growth that you would brag a lot about.
But, this is a major part of the point Mr. Sharma is trying to make.
The “supply side” slowdown of the economy will not be as dramatic as has been the case in the past, unemployment rates will continue to stay higher than might be expected while the labor force participation remains lower than before, and the other statistics on the economy will provide very mixed results.
The economy is transitioning and, as a result, markets will not function as they have in the past.
In other words, we must alter what we expect to happen over the next year or two.
Mr. Sharma:
“The global economy is heading into a period unlike any we have seen in decades.”
Policy Movements
Going into this period, we have two policy battles going on, almost independently of one another.
The Federal Reserve is in the middle of a period of quantitative tightening.
The U.S. economy has never gone through anything like this before.
The Federal Reserve is reducing its securities portfolio on a regular basis, regardless of what is 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.
Tight money.
Second, the federal government is going through a battle connected with the raising of the debt ceiling. This battle could go on through June, and although the two sides of the debate will finally agree on a “new” debt limit, it is not altogether clear, at this time, what that result might be.
The guess right now is that there will be some general reduction in the size of future deficits.
But, if the problem, as described above, is one found on the “supply side” of the economy, little or nothing is going to happen to improve the situation surrounding inflation.
The federal government will still be pushing the economy from the demand side, and the central bank will still be reducing demand by shrinking its balance sheet.
Not really the medicine proposed by Mr. Sharma.
This leaves us without much optimism about finding a path to reduce inflation and get the economy moving back into a stable, productive growth path.
The State Of Things
The U.S. economy is in a real fix.
The “credit inflation” that was pursued from the 1980s through until 2020 created an environment that asset price inflation was tolerated while consumer price inflation was not.
Then we got the “pandemic” period, 2020 through 2022, where the economy was thrown into even greater disequilibrium through the period of pandemic, the period of supply disruptions, the period of an asset bubble, and so on.
We are on the other side of the bubble now, but the various situations where market disequilibrium existed have not been resolved. There is still much of the economic disruptions that remain.
This is what Mr. Sharma is pointing to when he states that “the world is not ready for the long grind ahead.”
We have to re-think about where we are and readjust what we are trying to do in order to regain stability and growth.
However, this does not seem to be the path that is being followed as we move into the debates and discussions facing us just over the horizon.
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