Economists lower their growth forecasts
Economic growth is set to slow in the coming months, according to a new consensus among forecasters. And that may be exactly what the US economy needs.
Why is this important: If past projections of continued rapid growth materialize, this would mean rising rather than falling inflationary pressures. The latest set of forecasts is more consistent with the economy returning to normal.
- The bad news is that slower growth makes the economy more vulnerable to recession, especially if unlucky negative shocks materialize.
- The good news is that it offers the possibility of lower inflation coupled with weaker, but still positive growth.
By the numbers: In a survey released today by the National Association for Business Economics, the median forecaster expects 2022 GDP to grow 1.8%, down from a median projection of 2.9% in February. (GDP growth was 5.5% in 2021.)
- This is consistent with other measures of economic consensus. For example, the Philadelphia Fed survey of professional forecasters watch An expected GDP growth of 2.5% in 2022 in a press release of May 13, against 3.7% in February.
These revised forecasts reflect everything that has happened over the past three months. Financial markets have started to price in more aggressive monetary tightening from the Federal Reserve, as well as the negative effects of the war in Ukraine and the COVID lockdowns in China.
- It is also clear that the risk of a recession has increased in recent times. Some 77% of NABE survey participants see the risks on the downside, and more than half see the odds of a recession next year at more than 25%.
- But downgrading growth forecasts is exactly what policymakers are looking for as they try to lower inflation.
Instinct : In the long term, economic growth is limited by the number of workers and productivity gains. Fed leaders, for example, believe that the potential long-term growth rate for the United States is around 1.8%.
- Growth can exceed this figure for short periods, such as when people return to work after a recession. It can also change depending on factors such as immigration policies (which can attract more workers) or technological advances (which generate higher productivity).
But in an economy as in 2022, with an already extremely tight labor market, growth in line with the 2.9% forecast expected months ago would imply even more overheating that has fueled rising prices and dissatisfaction with shortages.
What they say : “The expected slowdown in growth should produce more benign inflation outcomes,” JPMorgan economists wrote in a research note last week. They lowered their second-half growth forecast to 2.4% from 3% previously.
- They acknowledged that the link between inflation and GDP has been tenuous lately. “But directionally at least, below-average growth increases our confidence that inflation will gradually ease back towards 2%.”
Presumably, growth could slow down to something near its 1.8% trend and stay there for a while. This would allow the labor market, the housing market and the markets for goods and services to better balance without the economy tipping into contraction.
The bottom line: The risk of recession is real, but the decline in growth that forecasters are now seeing seems like a good thing.