tag:theconversation.com,2011:/au/topics/recession-3373/articlesRecession – The Conversation2024-03-21T22:42:39Ztag:theconversation.com,2011:article/2263832024-03-21T22:42:39Z2024-03-21T22:42:39ZNZ is in recession – so far there are few signs the government has a plan to stimulate and grow the economy<p>If you live in New Zealand and you’re feeling poorer, you’re not imagining it.
Stats NZ has revealed the <a href="https://www.stats.govt.nz/news/economic-activity-falls-0-1-percent-in-the-march-2023-quarter/">economy was in recession</a> over the second half of last year. GDP fell in the September and December quarters by –0.3% and –0.1% respectively.</p>
<p>Taking into account the record high levels of immigration, Westpac’s most recent <a href="https://www.westpac.co.nz/assets/Business/tools-rates-fees/documents/economic-updates/2024/Bulletins/Economic-Data_Q4-GDP-preview_bulletin_11Mar24.pdf">economic bulletin</a> estimated this may equate to GDP per person having fallen almost 4% from its peak in mid-2022.</p>
<p>What does this mean politically, then, and what can the coalition do about it?
Because the statistics are retrospective, the new government can <a href="https://www.newstalkzb.co.nz/news/politics/pm-christopher-luxon-outlines-government-plan-for-next-100-days-blames-recession-on-labour/">blame the old one</a> – but that won’t satisfy many people for much longer. </p>
<p>The National-led government hasn’t enjoyed a post-election honeymoon. According to an <a href="https://www.ipsos.com/en-nz/23rd-ipsos-nz-issues-monitor-feb-2024">IPSOS poll</a> in late February, New Zealanders rated the coalition’s performance at 4.6 out of ten – on par with the Labour government (4.7) just before the general election in October 2023.</p>
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<h2>Internal contradictions</h2>
<p>The recession also means reduced tax revenues. Logically, something will have to give when Finance Minister Nicola Willis puts the final touches on her first budget, to be delivered on May 30.</p>
<p>Tax cuts – which National has promised – could exacerbate inflation or delay its decline. Although inflation has been coming down, it’s still some way from the target 1–3% range. The December figure was 4.7%.</p>
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Read more:
<a href="https://theconversation.com/the-first-100-days-of-tax-policy-bode-well-for-nationals-supporters-others-might-be-worried-225259">The first 100 days of tax policy bode well for National's supporters – others might be worried</a>
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<p>If income is weaker than expected, tax cuts would be paid for by deeper spending cuts, revenues raised elsewhere, or borrowing. The last option lacks credibility, given the way proposed <a href="https://www.theguardian.com/politics/2023/jul/26/kwarteng-mini-budget-obr-stock-market-pound">unfunded tax cuts</a> hastened the political demise of the then UK prime minister, Liz Truss, in 2022. </p>
<p>Luxon and Willis have some difficult fiscal decisions to make. And there’s pressure, <a href="https://www.rnz.co.nz/news/political/511978/winston-peters-signals-he-won-t-compromise-on-nz-first-election-commitments">especially from NZ First leader Winston Peters</a>, to honour the coalition agreements. Peters has already made life difficult for Willis by repeating one <a href="https://www.thepost.co.nz/politics/350214837/how-big-your-fiscal-hole-national">published estimate</a> of a potential NZ$5.6 billion “gap” between National’s election promises and “current forecasts”.</p>
<h2>Missing innovation and skills policies</h2>
<p>In the meantime, people are struggling to make ends meet and appear to lack confidence in the new government. </p>
<p>According to the IPSOS poll, the National Party has often been seen as more competent than other parties to deal with the economic problems. But National is in coalition with two other partners, both of which expect to see their own policies implemented.</p>
<p>There are incentives for all three parties, however, to convince at least most people they can achieve three closely related aims:</p>
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<li>deliver a prudent budget</li>
<li>improve economic efficiency and productivity</li>
<li>stimulate innovation and skills.</li>
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<p>Judgment on the first point should be reserved until we see the budget.</p>
<p>On the second point, the government is passing a law that will allow <a href="https://www.beehive.govt.nz/release/one-stop-shop-major-projects-fast-track">fast-track consenting</a> for approved projects. The government will also argue that reintroducing 90-day employment trials, for businesses with more than 20 staff, and repealing pay-equity law will help improve investment and hiring.</p>
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Read more:
<a href="https://theconversation.com/the-government-wants-to-fast-track-approvals-of-large-infrastructure-projects-thats-bad-news-for-nzs-biodiversity-225790">The government wants to fast-track approvals of large infrastructure projects – that's bad news for NZ's biodiversity</a>
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<p>But the fast-track law is attracting criticism from environmental groups and legal experts for giving <a href="https://www.rnz.co.nz/news/political/512259/the-unprecedented-power-the-government-is-handing-three-of-its-ministers-under-its-new-fast-track-approval-bill">extraordinary powers</a> to ministers. Trade unions strongly oppose the employment law changes.</p>
<p>On the final point, the government seems to have few ideas – least of all how to prepare for the coming wave of AI-driven change. Tertiary education and research and development would be priorities here, but there are no new policy initiatives around trades training and advanced research.</p>
<h2>A lot riding on Budget 2024</h2>
<p>In the meantime, the reinstatement of <a href="https://www.newshub.co.nz/home/politics/2024/03/prime-minister-christopher-luxon-says-renters-very-grateful-government-bringing-back-interest-deductibility-for-landlords.html">tax deductibility of interest payments</a> on rental properties does nothing at all to contribute to fiscal prudence, productivity or innovation.</p>
<p>It simply benefits the owners of things that have already been built and sold. And it’s very unlikely to lead to lower rents, contrary to Christopher Luxon’s <a href="https://www.1news.co.nz/2024/03/13/renters-very-grateful-for-incoming-landlord-tax-breaks-luxon/">suggestion</a> it would apply “downward pressure” for which renters would be grateful.</p>
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Read more:
<a href="https://theconversation.com/applying-for-a-home-felt-harder-than-applying-for-a-job-nz-private-rentals-wont-solve-need-for-emergency-housing-225459">'Applying for a home felt harder than applying for a job': NZ private rentals won't solve need for emergency housing</a>
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<p>No government can literally “grow the economy” – regardless of the National Party’s <a href="https://www.national.org.nz/national_will_cut_red_tape_to_grow_the_economy">pre-election hype</a>. Economies grow as people produce more efficiently more of the things others are keen to pay for. A government’s actions and policies may either help or hinder the productivity of individuals, firms and the economy as a whole.</p>
<p>The present government’s economic credibility, and hence its political viability, are more seriously in question than would normally be the case so early in its first term. </p>
<p>There are things Luxon and his team can do to turn that around. But people want and need policies that will noticeably boost their material standard of living – sooner rather than later. A lot will depend on Budget 2024.</p><img src="https://counter.theconversation.com/content/226383/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grant Duncan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>With voter confidence already low, the National-led coalition will have difficulty fulfilling pre-election promises while delivering a prudent budget in May.Grant Duncan, Visiting Scholar in Politics, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2230312024-03-13T16:44:25Z2024-03-13T16:44:25ZWith the UK creeping out of recession, here’s an economist’s brief guide to improving productivity<figure><img src="https://images.theconversation.com/files/577347/original/file-20240222-30-l4cov4.jpg?ixlib=rb-1.1.0&rect=72%2C51%2C3363%2C1942&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Keep on digging.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/view-digger-working-on-building-site-1359679658">kstuart/Shutterstock</a></span></figcaption></figure><p>At the end of last year, the UK was <a href="https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/gdpfirstquarterlyestimateuk/octobertodecember2023">officially in recession</a>. The economy shrank by 0.3% between October and December 2023, after a previous contraction between July and September.</p>
<p>New figures for January 2024 show <a href="https://www.bbc.co.uk/news/business-68550259">a slight improvement</a>. But there is nothing to indicate that the UK has made meaningful progress when it comes to <a href="https://www.productivity.ac.uk/research/the-midlands-productivity-challenge-exploring-the-issues/">productivity growth</a> – and how the UK needs to produce more goods and services if living standards and wages are to improve. </p>
<p><a href="https://www.productivity.ac.uk/">Productivity growth</a> in the UK has been <a href="https://www.productivity.ac.uk/research/the-productivity-agenda-report/">virtually non-existent</a> since the financial crisis of 2008. It lags significantly behind countries like Germany and France, and even further behind the US. </p>
<p>Growing productivity is not easy. Having <a href="https://gtr.ukri.org/projects?ref=ES%2FS002278%2F1">researched this area</a> of the economy extensively, <a href="https://www.productivity.ac.uk/research/the-midlands-productivity-challenge-exploring-the-issues/">I’m acutely aware</a> of the the challenges facing firms which are trying to be more productive. They include everything from investment levels and access to research and development to regional inequality and a shortage of skills.</p>
<p>But there are some things that could be done to improve the situation. And two of the most important ones are greater investment, and a more localised approach to the national economy.</p>
<p>For example, one major problem in the UK is that its labour market <a href="https://www.wbs.ac.uk/news/how-policymakers-can-win-the-global-war-for-talent/">prioritises what economists call “flexibility”</a> – allowing firms to hire and fire employees fairly easily (compared say with France, where it is more difficult) – and getting people into entry-level jobs. It is much <a href="https://ifs.org.uk/publications/investment-training-and-skills">less focused on training</a> and development. </p>
<p>Major investment in training at all levels, from basic skills through to high-level technical and managerial skills, would make <a href="https://www.researchgate.net/publication/260219097_THE_IMPACT_OF_EMPLOYEE_TRAINING_AND_DEVELOPMENT_ON_EMPLOYEE_PRODUCTIVITY">workers more productive</a>. It would allow greater job mobility, which in turn leads to a better match between demand and supply. </p>
<p>The UK also <a href="https://www.economicsobservatory.com/boosting-productivity-why-doesnt-the-uk-invest-enough">needs to invest</a> in what’s known as “capital equipment” – the stuff that businesses use to produce things. For a building company this might mean buying a JCB digger instead of shovels, or for a dressmaker it could be buying a sewing machine. Put simply, if UK industries had more kit, productivity would improve.</p>
<p>A recent change to <a href="https://www.gov.uk/capital-allowances/first-year-allowances">capital allowances</a> which allows firms to offset investment against tax is welcome. But companies need to know that this will stay, and not be subject to political changes and inconsistent economic policy.</p>
<h2>Freedom to grow</h2>
<p>So money needs to be spent, and investments need to be made. But another crucial element is that the money needs to be invested locally, in the places where people actually live and work. </p>
<p>To be truly beneficial, this needs close collaboration between local authorities, education providers and the private sector. <a href="https://gtr.ukri.org/projects?ref=ES%2FS002278%2F1">Local knowledge</a> about where certain sectors are being held back, what skills are required and where they are needed, is fundamental. </p>
<p>Local authorities should be able to address these issues, rather than having to constantly defer to London. This means doing two more things (neither of which have ever had national government support). </p>
<p>The first is simplifying the workings of local government, which is <a href="https://link.springer.com/chapter/10.1007/978-3-031-41792-4_14">notoriously complex</a> and a <a href="https://www.productivity.ac.uk/research/levelling-up-local-growth-and-productivity-in-england/">constant drag</a> on regional productivity. </p>
<p>And the second is helping those local governments <a href="https://lipsit.ac.uk/wp-content/uploads/2021/09/FINAL-Levelling-up-Report-digital.pdf">financially</a>, not just in terms of the <a href="https://theconversation.com/one-in-five-councils-at-risk-of-bankruptcy-what-happens-after-local-authorities-run-out-of-money-222541">current funding crisis</a>, but also by allowing then to plan investments in skills and infrastructure over the long term, rather than having to bid piecemeal for short term funding. </p>
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<img alt="Labelled cogs in a machine." src="https://images.theconversation.com/files/577348/original/file-20240222-30-ctiofr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/577348/original/file-20240222-30-ctiofr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=300&fit=crop&dpr=1 600w, https://images.theconversation.com/files/577348/original/file-20240222-30-ctiofr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=300&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/577348/original/file-20240222-30-ctiofr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=300&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/577348/original/file-20240222-30-ctiofr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=377&fit=crop&dpr=1 754w, https://images.theconversation.com/files/577348/original/file-20240222-30-ctiofr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=377&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/577348/original/file-20240222-30-ctiofr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=377&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Everything connects.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/macro-photo-tooth-wheel-mechanism-productivity-736661698">EtiAmmos/Shutterstock</a></span>
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<p>It is clear to me from the work I have done in the West Midlands area of England that the UK economy is far too centralised. Everything from access to finance and venture capital, to investment in skills and infrastructure is <a href="https://ifs.org.uk/inequality/wp-content/uploads/2023/02/Levelling-up-economics-IFS-Deaton-Review-of-Inequality.pdf">heavily skewed</a> towards the south east. </p>
<p>Away from that region, the <a href="https://ifs.org.uk/inequality/wp-content/uploads/2023/02/Levelling-up-economics-IFS-Deaton-Review-of-Inequality.pdf">UK has a low level</a> of what economists call “aglomeration economies”, where a particular industry is concentrated within a geographical area, and supported by decent infrastructure and a good supply of skilled workers. </p>
<p>Compared to Germany or France, public transport in the UK is <a href="https://www.centreforcities.org/publication/comparing-public-transport-uk-europe-cities/">expensive and patchy</a>, meaning people in towns often can’t access employment opportunities in cities which are relatively close by. This means that we see high levels of inequality over short distances, where poverty exists close by to great wealth. </p>
<p>This kind of imbalance could be addressed by combining increased investment (both public and private) with a much greater willingness to understand the various British regions which make up a currently disunited kingdom. These two steps would make the whole economic system more resilient, and in the long term, more productive.</p><img src="https://counter.theconversation.com/content/223031/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nigel Driffield receives funding from the economic and social research council. He has also received funding in the past from Nuffield and Leverhulme trusts, the OECD, UNCTAD, and carried out research for various U.K. government departments.
He is also an inactive member of the Labour Party </span></em></p>The country is crying out for more investment, and more devolution would help deliver it.Nigel Driffield, Professor of International Business, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2249632024-03-05T09:48:44Z2024-03-05T09:48:44ZPrepare to hear about an ‘official recession’. Unofficially, we’ve been in one for some time<p>Australians are set to find out if we are on the edge of a so-called “official” recession.</p>
<p>Due out <a href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release">mid-Wednesday</a>, the national accounts will either show spending, incomes and production continued to grow in the three months to December, or show they fell.</p>
<p>If they fell, it would be the first of the two strikes needed for what some people call an “official” recession. (Though surprisingly, there’s no such thing here in Australia, as I’ll explain later.)</p>
<p>The second strike would be a fall in the following three months, the so-called March quarter. If we get <a href="https://www.investopedia.com/terms/r/recession.asp#:%7E:text=The%20Bottom%20Line-,A%20recession%20is%20a%20significant%2C%20widespread%2C%20and%20prolonged%20downturn%20in,the%20economy%20is%20in%20recession.">two quarters in a row</a>, all manner of people – probably including the treasurer – will declare it a recession.</p>
<p>But whatever Wednesday’s data shows, the truth is we are already experiencing the biggest dive in living standards in half a century – and have been for two years.</p>
<h2>How to spot a genuine recession</h2>
<p>The figures due out on Wednesday will give us an indication of whether ordinary Australians are better or worse off, if we know where to look.</p>
<p>The first thing to do is to put to one side the headline increases or falls in gross domestic product (GDP). Those are spending, income and production over the entire economy each three months.</p>
<p>Those figures show GDP growth was weak before the pandemic, very weak during lockdowns (shrinking for two successive quarters), then strong as lockdowns ended. It’s been exceedingly weak since.</p>
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<p>But this tells us little about spending and income per person, which is how each of us experiences daily life.</p>
<p>Adjusted for our current very high rate of population growth, GDP per person is extremely weak. It’s been falling, or barely growing, for three quarters now.</p>
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<p>And even this doesn’t tell us enough. </p>
<p>What matters most for each one of us – in the view of Chris Richardson, formerly of Deloitte Access Economics – is <a href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release">real household disposable income per capita</a>.</p>
<p>Unfortunately, the bureau of statistics doesn’t display this on its website. But it’s easy enough to calculate from the bureau’s spreadsheets.</p>
<p>It’s the income accruing to households, adjusted for the prices paid by households, and then adjusted some more.</p>
<p>The bureau also subtracts taxes paid (which have climbed because of the expiry of the <a href="https://theconversation.com/why-do-i-suddenly-owe-tax-this-year-it-could-be-because-the-low-and-middle-income-tax-offset-is-gone-forever-214632">temporary tax offset</a> in mid-2023). And it subtracts net interest payments, most of which are mortgage payments.</p>
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<p>In his public presentations, Richardson says he refers to real household disposable income per capita as “living standards”, because that’s what it measures.</p>
<p>It shows weak spending, rising prices, a greater tax take, and much greater payments on mortgages have been shrinking living standards for two years.</p>
<p>That’s how it has felt for two years, even if the way the pain has been spread has been different than in the past.</p>
<h2>The biggest dive in living standards in half a century</h2>
<p>Previous dips in household disposable income per capita have been accompanied by high unemployment, concentrating the pain in the unlucky group looking for work at the time. </p>
<p>In contrast, this dip in living standards has been accompanied (so far) by low unemployment, pushing more of the burden onto working taxpayers.</p>
<p>Looked at through a longer-term lens (the longest the bureau’s spreadsheets allow) the latest dive in real household disposable income per capita is the biggest in half a century.</p>
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<p>The broad picture is of fairly steady living standards until the mid-1990s, accelerating living standards during the 2000s mining boom, and then fairly flat (rising slowly) after the 2008-2009 global economic crisis. </p>
<p>They jumped for a bit during the COVID lockdowns, because of all the government assistance. But they’ve been diving since.</p>
<h2>There’s no such thing as an official recession</h2>
<p>Perhaps surprisingly, given how much we talk about “official” recessions, even the Reserve Bank of Australia says <a href="https://www.rba.gov.au/education/resources/explainers/recession.html">“there is no single definition of recession”</a> here.</p>
<p>Many people talk about a recession meaning two quarters in a row of shrinking spending and income. This appears to date back to a 1974 <a href="https://www.nytimes.com/1974/12/01/archives/the-changing-business-cycle-points-op-view.html">New York Times</a> article, written by a US business cycle expert Julius Shiskin. </p>
<p>He said two quarters of shrinking economic activity was <em>one</em> of the criteria you could use to decide whether or not an economy was in recession. </p>
<p>Shiskin’s pronouncement was subsequently latched on to by journalists all over the world, who made it <em>the</em> definition because it was simple.</p>
<p>But it has led to nonsensical conclusions.</p>
<h2>How Australia and the US differ</h2>
<p>Three decades ago, after the release of the <a href="https://www.ausstats.abs.gov.au/ausstats/free.nsf/0/9B5F32621050BC95CA2575050019621A/$File/52060_1990_SEP.pdf">September 1990</a> national accounts on November 29, Treasurer Paul Keating declared they showed Australia in recession. </p>
<p>Keating famously added: </p>
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<p>the most important thing is this is the recession that Australia had to have.</p>
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<p>Those words live on, but the so-called “recession” didn’t. It vanished soon after. What had been a small decline in economic activity, followed by a big decline, got revised to become a small increase, followed by a big decline.</p>
<p>How? The Australian Bureau of Statistics revises the national accounts as a matter of course, each time new information comes in. </p>
<p>Its revisions moved Australia’s early 1990s recession to the March and June quarters of <a href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/sep-2023/5206001_Key_Aggregates.xlsx">1991</a>. </p>
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Read more:
<a href="https://theconversation.com/per-capita-recession-as-chalmers-says-gdp-steady-in-the-face-of-pressure-212642">Per capita recession as Chalmers says GDP 'steady in the face of pressure'</a>
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<p>A “recession” even <a href="https://www.smh.com.au/opinion/australias-national-accounts-recession-were-not-even-close-20161207-gt5zih.html">briefly</a> appeared after revisions to the 2000 national accounts, under Prime Minister John Howard and Treasurer Peter Costello. Then it disappeared, after further revisions.</p>
<p>In the United States, they’re not nearly as mechanical. There, there isn’t an official recession until a committee of elders convened by the National Bureau of Economic Research says so. Its <a href="https://www.nber.org/research/business-cycle-dating">proclamations</a> have broad support.</p>
<p>If Wednesday’s figures show Australia’s economic activity shrinking, we will hear a lot more about an “official” recession. But it will make little difference to Treasurer Jim Chalmers as he prepares this year’s May budget.</p>
<p>Just like the rest of us, he knows things are going backwards.</p><img src="https://counter.theconversation.com/content/224963/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin is Economics Editor of The Conversation.</span></em></p>The best measure of living standards – real household disposable income per capita – has been going backwards for two years. It’s the biggest dive in living standards in half a century.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2249112024-03-04T20:04:37Z2024-03-04T20:04:37Z10 reasons why Canadians are still dissatisfied with the economy, despite the upswing<figure><img src="https://images.theconversation.com/files/579277/original/file-20240301-24-yhh7th.jpg?ixlib=rb-1.1.0&rect=69%2C62%2C4531%2C3004&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Recent surveys suggest Canadians are dissatisfied with the direction of the economy. </span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><p>The COVID-19 pandemic <a href="https://www.cbc.ca/news/health/who-pandemic-not-emergency-1.6833321">is no longer a global emergency</a>, Canada’s GDP <a href="https://www.ctvnews.ca/business/economic-bounce-back-at-the-end-of-2023-could-push-back-rate-cuts-economists-say-1.6749435">outperformed expectations in 2023</a>, the economy seems to be heading for <a href="https://www.theglobeandmail.com/business/economy/article-statistics-canada-november-gdp-economy">soft landing after a period of stagnation</a>, inflation is <a href="https://www.cbc.ca/news/business/inflation-january-2024-1.7119796">winding down</a> and unemployment has decreased to <a href="https://www150.statcan.gc.ca/n1/daily-quotidien/240209/cg-a002-eng.htm">5.7 per cent in January 2024</a> — close to pre-pandemic levels. </p>
<p>Despite these positive economic indicators, recent surveys suggest Canadians are <a href="https://policyoptions.irpp.org/magazines/december-2023/canadians-unhappy/">dissatisfied with the direction of the economy</a>. An overwhelming <a href="https://www.ipsos.com/en-ca/pessimism-mounts-about-future-economy-and-affordability">84 per cent of Canadians</a> believe the country is already in a recession, with 73 per cent anticipating one within the next year. <a href="https://www.cbc.ca/documentarychannel/features/generation-fear-how-bad-news-has-created-an-anxious-generation">Young people, in particular, are fearful of the future</a>.</p>
<p>This discrepancy prompts the question: Why are Canadians’ sentiments so <a href="https://www.theglobeandmail.com/business/article-canada-economy-mental-health/">at odds with economic indicators</a>? As economists, we have identified several reasons that explain why this gap exists.</p>
<h2>1. Growing socio-economic divide</h2>
<p><a href="https://www.thestar.com/business/gap-between-canada-s-rich-and-poor-increasing-at-record-speed-new-statcan-data-shows/article_c1477d8f-4961-5691-9179-a5b8cabaace9.html">Income and wealth inequality</a> are both growing at an alarming rate in Canada. <a href="https://www150.statcan.gc.ca/n1/daily-quotidien/230704/dq230704a-eng.htm?HPA=1">The wealthiest 20 per cent now</a> account for more than two-thirds of net worth, compared to the 2.7 per cent held by the bottom 40 per cent.</p>
<p><a href="https://www150.statcan.gc.ca/n1/daily-quotidien/240122/t001a-eng.htm">The top 20 per cent accounted</a> for 40.3 per cent of net disposable income in 2023, while the bottom 20 per cent accounted for just 6.1 per cent. The <a href="https://globalnews.ca/news/10085442/canada-top-income-earners-post-covid/">top one per cent of earners</a>, meanwhile, have grown even richer. </p>
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<p>In contrast, the number of people in the <a href="https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1110024101">low-income cutoff group</a> keeps increasing. Net saving for the lowest income households decreased by <a href="https://www150.statcan.gc.ca/n1/daily-quotidien/240122/dq240122a-eng.htm">9.8 per cent</a> in the third quarter of 2023 compared to the previous year.</p>
<h2>2. Debt servicing burdens</h2>
<p>Since the onset of the pandemic, net savings have deteriorated for all except those with the highest incomes, as renters and lower-income families tend to spend more than they make on necessities.</p>
<p>Canada currently holds the <a href="https://www150.statcan.gc.ca/n1/en/pub/11-631-x/11-631-x2024002-eng.pdf?st=ytPi2j-5">highest amount of household debt as a percentage of disposable income</a> among all G7 countries. With the current high interest rates, the burden of interest payments for households as a percentage of disposable income recently reached its highest level in 12 years.</p>
<h2>3. Interest rates</h2>
<p>The average disposable income for the <a href="https://www150.statcan.gc.ca/n1/daily-quotidien/240122/dq240122a-eng.htm">top 20 per cent of Canadians is increasing at the fastest rate</a> of any income group. This means those with financial assets benefit from rising interest rates, while those at the bottom suffer from the burden of greater debt service.</p>
<h2>4. Housing costs</h2>
<p>Skyrocketing housing prices have outpaced income and mortgage rates have gone up dramatically, resulting in the lowest <a href="https://globalnews.ca/news/10167093/housing-affordability-bank-canada-index/">home affordability index</a> in the last 40 years. The dream of home ownership seems more distant than ever for many.</p>
<h2>5. Impact of inflation</h2>
<p>Although <a href="https://www.reuters.com/world/americas/canadas-inflation-rate-drops-more-than-expected-29-january-2024-02-20/">Canada’s inflation rate shows signs of slowing</a>, it still remains fairly high. It reached <a href="https://www.cbc.ca/news/business/canada-inflation-rate-1.6526060">a 39-year high of 8.1 per cent in June 2022</a>, hitting <a href="https://globalnews.ca/news/9474837/low-income-canadians-inflation-statcan-report/">those in low-income groups</a> the hardest.</p>
<h2>6. Growing corporate concentration</h2>
<p>Canada’s most concentrated industries have become even <a href="https://www.bnnbloomberg.ca/competitive-decline-hurting-canadian-consumers-businesses-comp-bureau-1.1986903">less competitive</a>, and the number of highly concentrated industries is growing. <a href="https://www.cbc.ca/news/business/canada-competition-bureau-report-1.7001320">Profit margins</a> and markups of already profitable firms is increasing. </p>
<p>This trend negatively impacts consumers and broader society by reducing industry dynamism, resulting in fewer choices and higher costs. </p>
<p>We are seeing this currently play out in the grocery sector, where <a href="https://theconversation.com/increasing-monopoly-power-poses-a-threat-to-canadas-post-pandemic-economic-recovery-209308">a lack of competition has resulted in higher food prices</a>. This is the same reason why <a href="https://www.ionajournal.ca/exchange/2023/1/21/sky-high-prices-why-its-so-expensive-to-fly-in-canada-and-how-to-change-this">airplane tickets</a> and <a href="https://www.cbc.ca/news/business/marketplace-high-cell-phone-bills-1.6711205">cell phone bills</a> remain higher in Canada than in comparable countries.</p>
<h2>7. Mental health struggles</h2>
<p>The proportion of people reporting very good or excellent mental health <a href="https://www150.statcan.gc.ca/n1/daily-quotidien/230913/dq230913b-eng.htm">decreased to 59 per cent in 2021 from 72.4 per cent in 2015</a>. </p>
<p>The prevalence of some chronic conditions, including high blood pressure, heart disease and obesity, increased from 2015 to 2021 as well. </p>
<p>Financial anxiety, pandemic-related stress and other issues are making <a href="https://www.thestar.com/life/are-canadians-getting-angrier-heres-what-experts-say-is-happening-and-how-we-can-tame/article_6457ee6a-56ce-5d84-a2ea-53b3bef15ed5.html">Canadians feel angrier in general</a>, which affects their outlook on life and the economy.</p>
<h2>8. Long COVID</h2>
<p>While the impacts of the pandemic are slowing down, long COVID is still a significant issue for many. <a href="https://www.cbc.ca/news/health/long-covid-symptoms-canadians-1.7053485">One in nine people</a> who contracted COVID-19 suffer from symptoms, including brain fog, <a href="https://doi.org/10.1056/NEJMoa2311330">cognitive impairment</a>, fatigue and shortness of breath, that affect their health and well-being. </p>
<p>It is shortsighted to assume we have all recovered equally from the pandemic when some people are still being affected by it.</p>
<h2>9. Higher education funding cuts</h2>
<p>College education has historically served as “<a href="https://www.britannica.com/topic/Education-The-Great-Equalizer-2119678">the great equalizer</a>” and an instrument of intergenerational social mobility, but in the face of <a href="https://universityaffairs.ca/news/news-article/the-rising-financial-precarity-of-universities/">declining government support for post-secondary education</a>, this may no longer be the case. </p>
<p>The financial situation of many colleges is <a href="https://www.thestar.com/politics/provincial/almost-half-of-ontario-universities-are-running-deficits-putting-student-services-at-risk-council-says/article_639ebedc-af31-11ee-bdce-47e37d4e1808.html">increasingly precarious</a>, meaning post-secondary institutions could end up raising tuition fees or rely more on international students to meet their budgets, both of which affect domestic students. </p>
<p>Students from the lowest economic stratum will increasingly find it difficult to trade the security of a job right out of high school for the high cost of a university or college degree. This, in turn, will reduce their chances to move up in the socio-ecnomic ladder.</p>
<h2>10. Youth struggles</h2>
<p><a href="https://www.nytimes.com/2024/01/29/upshot/teens-politics-mental-health.html">Youth across North America</a> are more anxious about their future, concerned about their mental health and educational prospects and more disillusioned by politicians than previous generations. </p>
<p>Despite being resilient and pragmatic, <a href="https://globalnews.ca/news/8360411/gen-z-canada-future-youth-leaders/">Gen Z are pessimistic about the world around them</a> and the future ahead. They worry about their financial security, with high costs of rent and groceries. </p>
<p><a href="https://www.theglobeandmail.com/canada/article-gen-z-is-a-climate-anxious-pessimistic-force-to-be-reckoned-with">A 2023 survey from the <em>Globe and Mail</em></a> found that nearly three-quarters of Gen Z disagreed that, as a generation, they would surpass their parents. Fifty-six per cent feel afraid, sad, anxious and <a href="https://doi.org/10.1016/j.joclim.2023.100204">powerless about climate changes</a>, while 78 per cent reported that climate anxiety is impacting their mental health. </p>
<h2>Navigating the disconnect</h2>
<p>While more than <a href="https://angusreid.org/2024-canada-optimism-pessimism-expectations/">40 per cent of Canadians</a> hope for positive outcomes in 2024 and the macroeconomic indicators show prosperity, there exist numerous factors causing dissatisfaction in large swathes of the population in Canada. </p>
<p>Managers, business leaders, policymakers, government officials and economists should all care deeply about this issue. Over-relying on aggregate indicators — like macroeconomic prosperity — while making strategic, investment, hiring and financing decisions could lead to unexpected outcomes and challenges.</p>
<p>For example, a real estate company might decide to invest in a large, low-end housing project based on economic numbers. While the initial logic may seem sound — if the economy is doing well, that there should be a huge demand for housing — issues might arise if the target population is financially strained and unable to afford the housing.</p>
<p>A comprehensive understanding of the mindset, risk preferences and motivating factors of key customers, stakeholders, investors, employees and voters is essential for making well-informed decisions that benefit all parties involved.</p><img src="https://counter.theconversation.com/content/224911/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anup Srivastava receives research funding from the Social Sciences and Humanities Research Council of Canada.</span></em></p><p class="fine-print"><em><span>Felipe Bastos Gurgel Silva, Luminita Enache, and Manuela Dantas do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There are a number of reasons why there’s such a significant gap between aggregate economic numbers and the perceptions of everyday people.Anup Srivastava, Professor and Canada Research Chair, Haskayne School of Business, University of CalgaryFelipe Bastos Gurgel Silva, Assistant Professor, Trulaske College of Business, University of Missouri-ColumbiaLuminita Enache, Associate Professor of Accounting and Future Fund Fellow, Haskayne School of Business, University of CalgaryManuela Dantas, Assistant Professor, Department of Accounting, California State University, NorthridgeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2242202024-02-25T14:20:26Z2024-02-25T14:20:26ZHere’s what we can learn from Canada’s response to inflation in the 1980s and 1990s<p>For the last two years, inflation has been at top of mind for Canadians. It is a tax on households. When prices rise, <a href="https://www.bankofcanada.ca/2020/08/understanding-inflation">the purchasing power of each dollar earned falls</a>.</p>
<p>This generates huge losses for the economy, as well as households on fixed incomes, and increases uncertainty, making it more difficult to plan for the future.</p>
<p>The real question in the minds of many economists is what the trend in inflation will be going forward, and when interest rates will begin to fall and bring relief to Canadians.</p>
<p>While this episode of inflation has created challenges for many, this is not the first time Canada has gone through such an experience; we have been here before.</p>
<h2>Inflation in the 1980s and 1990s</h2>
<p>Canada faced a serious inflation problem in the 1980s and 1990s when the consumer price inflation (CPI) index hit <a href="https://economics.td.com/ca-inflation-new-vintage">13 per cent in 1980 and was still at seven per cent in 1991</a>. </p>
<p>To solve this issue, in 1991, the Bank of Canada and the Minister of Finance agreed on a plan <a href="https://www.bankofcanada.ca/core-functions/monetary-policy/agreement-inflation-control-target/">to bring inflation down to a target level</a>. Initially, this was six per cent, but this was lowered to two per cent (within a one to three per cent range).</p>
<p>The Bank of Canada <a href="https://www.bankofcanada.ca/2022/04/understanding-policy-interest-rate">uses the overnight rate to control inflation</a>. This rate determines the rates of government treasury bills, the bank rate and variable rate mortgages. </p>
<p>In August 1981, <a href="https://www.huffpost.com/archive/ca/entry/high-interest-rates-canada-economy_ca_5fe4d080c5b66809cb30a445">the Bank of Canada pushed this rate to well over 20 per cent</a> — equivalent to a variable rate mortgage cost today of almost 23 per cent. In May 1990, the central bank increased the rate to almost 14 per cent. In both cases, the central bank brought inflation down, <a href="https://www.thecanadianencyclopedia.ca/en/article/recession">but at the cost of a serious economic slowdown</a>. </p>
<h2>The pandemic fuelled inflation</h2>
<p>The <a href="https://www.reuters.com/markets/us/canada-expected-renew-policy-framework-amid-concerns-about-rising-inflation-2021-12-13">inflation target was most recently renewed in December 2021</a>. It was remarkably effective until summer 2021, when inflation exceeded the three per cent range and <a href="https://www150.statcan.gc.ca/n1/daily-quotidien/220720/dq220720a-eng.htm">peaked at over eight per cent in June 2022</a>.</p>
<p>The root cause of this inflation was not domestic like it had been in the 1990s. Rather, it was in response to the COVID-19 pandemic, which affected <a href="https://www.weforum.org/agenda/2022/06/inflation-stats-usa-and-world">all major Western economies</a>. </p>
<p>Canada was not alone in increasing its debt so citizens could stay home and limit the spread of infection. The Bank of Canada <a href="https://www.bankofcanada.ca/2020/05/our-policy-actions-in-the-time-of-covid-19/">lowered the overnight rate to 0.25 per cent</a> and intervened massively to <a href="https://www.bankofcanada.ca/2020/08/our-covid-19-response-large-scale-asset-purchases/">buy the government’s debt</a>.</p>
<p>Initially, <a href="https://thoughtleadership.rbc.com/proof-point-fewer-supply-chain-snarls-wont-be-enough-to-lower-inflation-to-2/">it was believed these inflation increases would reverse as supply chain challenges resolved</a>, so <a href="https://amp.cbc.ca/embed/index.html?preview=0&embed_type=customhtml&content_id=1.6807771&position=0&api=prod">central banks were slow to react</a>.</p>
<p>But this assumption proved false. As the pandemic receded, Canadians began spending <a href="https://www.theglobeandmail.com/business/article-canadians-savings-stockpile-is-a-300-billion-quandary-for-the">the money they had stored away during lockdowns</a>. With low interest rates, the prices of assets like houses and shares dramatically increased. The Russian invasion of Ukraine <a href="https://www.federalreserve.gov/econres/notes/feds-notes/the-effect-of-the-war-in-ukraine-on-global-activity-and-inflation-20220527.html">added another economic shock</a>. </p>
<p>By this point, high inflation had started to become entrenched in the expectations of businesses, unions and individuals. As history shows, once inflation becomes entrenched in the economy, <a href="https://www.imf.org/en/Blogs/Articles/2023/10/04/how-managing-inflation-expectations-can-help-economies-achieve-a-softer-landing">it is very difficult to reverse</a>.</p>
<h2>Taming inflation</h2>
<p>The Bank of Canada, although slow to react, successfully reversed the increasing inflation trend with <a href="https://www.theglobeandmail.com/topics/bank-of-canada">10 interest rate increases between March 2022 and July 2023</a> and by increasing the overnight rate to five per cent.</p>
<p>Inflation fell to 3.1 per cent in <a href="https://www150.statcan.gc.ca/n1/daily-quotidien/231121/dq231121a-eng.htm">October</a> and <a href="https://www150.statcan.gc.ca/n1/daily-quotidien/231219/dq231219a-eng.htm">November 2023</a>, creating optimism about returning to levels that would assure the Bank of Canada that inflation had been tamed.</p>
<p>Despite core inflation remaining stubbornly above three per cent, this relative success allowed the central bank to hold the overnight rate at five per cent, increasing the possibility of lower interest rates. </p>
<p>This confidence was confirmed with the <a href="https://www.cbc.ca/news/business/inflation-january-2024-1.7119796">January CPI coming in at 2.9 per cent</a>, just inside the Bank of Canada’s operating band.</p>
<p>It’s clear that central banks must act as soon as they can to prevent inflationary expectations from becoming entrenched in the economy. Once entrenched, the economy ends up bearing significant pain to reverse it — pain that is not spread evenly across the population.</p>
<h2>Food and shelter costs</h2>
<p>Interest rates and inflation are inextricably linked and they affect households in different ways. The CPI measures the rate of inflation on a basket of goods, but not all households consume every good in the basket, and not all prices increase at the same rate. Therefore, the impact of inflation varies across groups.</p>
<p>Younger, <a href="https://www150.statcan.gc.ca/n1/pub/75-006-x/2023001/article/00002-eng.htm">poorer households spend a disproportionately large portion of their income on food</a>, which has seen major price increases over the last two years. Similarly, those commuting from the outskirts of metropolitan areas faced higher commuting costs when gasoline prices spiked. </p>
<p>However, the biggest anomaly is in housing costs, where increasing interest rates designed to lower inflation automatically <a href="https://www.cpacanada.ca/news/pivot-magazine/2022-02-16-housing-market">translate into higher rental costs and imputed housing costs</a>.</p>
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<a href="https://theconversation.com/two-thirds-of-canadian-and-american-renters-are-in-unaffordable-housing-situations-221954">Two-thirds of Canadian and American renters are in unaffordable housing situations</a>
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<p>In its January 2024 CPI report, Statistics Canada reported that rental costs increased by 6.2 per cent year over year, while food price inflation was still up 3.9 per cent. </p>
<p>Together food and shelter costs amount to 45 per cent of the CPI, but younger, poorer households have disproportionately suffered because their price index is skewed more toward food and shelter. </p>
<h2>A waiting game</h2>
<p>The impact of higher interest rates in Canada’s mortgage market depends critically on the maturity of someone’s mortgage and rent controls.</p>
<p>Many households with variable rate mortgages, or those renewing mortgages during this period of high interest rates, <a href="https://theconversation.com/heres-how-the-bank-of-canadas-interest-rate-hike-to-5-will-impact-canadian-households-209369">are struggling with significantly higher mortgage payments</a>.</p>
<p>Additionally, those who know they will have to renew their mortgage in the coming year are taking steps to adjust to those increases. </p>
<p>In fact, approximately 20 per cent of mortgages held by some of Canada’s biggest banks are negatively amortized, meaning homeowner payments do not cover the monthly interest charges. So, each month, <a href="https://www.theglobeandmail.com/business/article-mortgage-borrowers-td-bmo-cibc-homeowners">the amount owed on the mortgage increases</a>. Needless to say, many are urgently hoping for interest rate reductions in 2024.</p>
<p>Right now, the Bank of Canada is waiting to see what happens to inflation in the coming months before deciding whether to hold the overnight rate where it is, decrease it or increase it. This decision hinges on whether it feels the underlying or core rate of inflation aligns with its target zone. </p>
<p>The central bank is well aware that signalling a reduction too early could feed into greater consumer spending and higher inflation. So interest rates could stay where they are for several more months. While shelter and food price inflation will moderate, don’t expect actual prices to revert back to pre-pandemic levels.</p><img src="https://counter.theconversation.com/content/224220/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The real question in the minds of many economists is what the trend in inflation will be going forward, and when interest rates will begin to fall and bring relief to Canadians.Walid Hejazi, Professor of International Business, Rotman School of Management, University of TorontoLaurence Booth, Professor, Rotman School of Management, University of TorontoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2198572023-12-19T16:54:29Z2023-12-19T16:54:29ZInterest rates have stopped rising, but 2023 hikes could still cause recession for some economies<figure><img src="https://images.theconversation.com/files/566140/original/file-20231217-29-oomab8.jpg?ixlib=rb-1.1.0&rect=40%2C17%2C2946%2C1949&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Central banks in the US, UK and Europe have been trying to slow inflation without creating a recession.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-vector/inflation-reduction-act-by-fed-federal-2218228849">eamesBot/Shutterstock</a></span></figcaption></figure><p>Central banks on both sides of the Atlantic kept their main interest rates unchanged for the fourth successive month in December 2023. These rates are closely watched because they set the minimum interest at which your bank borrows and lends. This determines the cost of credit for all firms and households with mortgages or other loans. </p>
<p>The European Central Bank (ECB), the US Federal Reserve and the UK Bank of England have raised interest rates sharply since the start of 2022. This was in response to a surge in inflation – the annual increase in consumer prices – far above the 2% rate that all these central banks now target. </p>
<p>But UK inflation is taking longer to respond than that of the US or EU. This has renewed debate over <a href="https://theconversation.com/interest-rate-hikes-are-not-the-only-tool-to-fight-uk-inflation-heres-what-the-government-should-do-208697">whether rate cuts are the best or only way</a> to keep inflation under control. It has also caused a shift in opinions about which western economies are most at risk of recession in 2024.</p>
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<a href="https://theconversation.com/is-the-uk-in-a-recession-how-central-banks-decide-and-why-its-so-hard-to-call-it-191237">Is the UK in a recession? How central banks decide and why it's so hard to call it</a>
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<p>Higher interest rates are designed to subdue inflation by reducing the amount people spend. Businesses and households are expected to save more when rates rise, in anticipation of greater interest payments (<a href="https://theconversation.com/interest-rates-why-your-mortgage-payments-are-going-up-but-your-savings-arent-and-how-better-monetary-policy-could-help-196528">although that doesn’t always happen</a>). It’s also hoped they’ll borrow less because of the extra interest they would be charged. Those with outstanding loans are left with less to spend on goods and services after paying their interest bill. </p>
<p>Governments are also affected. In the UK, interest on around a quarter of government debt is now <a href="https://www.nao.org.uk/press-releases/managing-government-borrowing/#:%7E:text=The%20type%20of%20debt%20that,to%20lenders%20rise%20with%20inflation.">linked to inflation</a>. This means more of the budget gets channelled into interest payments, leaving less to spend on public services, when the central bank raises rates.</p>
<p>This restraint doesn’t happen immediately, however. When borrowers take out fixed-rate loans, they aren’t affected by higher base rates until the deal expires. Almost a million UK borrowers, for example, are still on fixed rates of 2% or below that will only <a href="https://www.ons.gov.uk/peoplepopulationandcommunity/housing/articles/howincreasesinhousingcostsimpacthouseholds/2023-01-09">come up for renewal</a> – at current, higher rates – in the first quarter of 2024. The resulting delay of a year or more before past interest rate rises kick in makes it hard for central bankers to know when they’ve raised rates enough to cool the economy.</p>
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Read more:
<a href="https://theconversation.com/uk-bonds-have-hit-a-25-year-high-heres-what-that-means-for-the-economy-215188">UK bonds have hit a 25-year high – here's what that means for the economy</a>
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<p>Raising interest rates can also restrain inflation by encouraging foreign investors to buy bonds and other financial assets in a country’s currency. The resulting inflow of capital is likely to strengthen its exchange rate. This makes imports cheaper and can help to slow the overall rise in prices. </p>
<p>A stronger currency is especially effective for curbing inflation for economies that consume a high proportion of imports, such as the UK. But it also hurts exporters, and only works if interest rates rise above those of comparable economies. This may be one reason why the Bank of England has raised its interest rates faster and further than the ECB since February 2022.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/566141/original/file-20231217-15-zjp7ej.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Line chart showing the main central bank rates for UK, US, Europe staying low from 2012-2016 (except the US) and then rapidly rising at the end of 2021. Also shows Japan, which has stayed low thoughout." src="https://images.theconversation.com/files/566141/original/file-20231217-15-zjp7ej.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/566141/original/file-20231217-15-zjp7ej.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/566141/original/file-20231217-15-zjp7ej.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/566141/original/file-20231217-15-zjp7ej.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/566141/original/file-20231217-15-zjp7ej.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/566141/original/file-20231217-15-zjp7ej.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/566141/original/file-20231217-15-zjp7ej.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.statista.com/chart/21070/main-policy-interest-rates-in-selected-countries-and-regions/">Statista</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>Divergence ahead</h2>
<p>Although they hiked rates in similar fashion in 2022-23, these central banks are set to go different ways in 2024. </p>
<p>US rates are set to fall as inflation drops back towards the 2% target, having already slowed to 3.1% in November 2023 (from 6.4% in January). The US Federal Reserve has signalled two likely interest rate reductions, totalling 0.75%, in 2024. That’s falling into line with investors’ expectations, which can be gauged by the prices they’re prepared to pay for <a href="https://www.chathamfinancial.com/insights/what-is-a-forward-curve">trading or swapping</a> debt due at a future date and by interest rates on <a href="https://data.oecd.org/interest/long-term-interest-rates-forecast.htm">government bonds that mature several years from now</a>.</p>
<p>While the ECB’s forward guidance is less clear, its governor <a href="https://www.ecb.europa.eu/press/pressconf/2023/html/ecb.is231214%7Edf8627de60.en.html">has hinted at</a> a similar downward path in 2024 because projections now point to headline inflation dropping to 2.1% in 2025 – a year earlier than previously predicted. Eurozone inflation has already slowed sharply, to 2.4% in November from 8.5% in February 2023, despite the ECB keeping its interest rates lower than the US and UK throughout the recent tightening phase. That’s largely because, even though member states set their own fiscal policy, EU rules keep them on <a href="https://economy-finance.ec.europa.eu/system/files/2023-04/COM_2023_240_1_EN.pdf">a tight rein</a> when it comes to spending and debt levels.</p>
<p>In contrast the Bank of England has warned that its base rate, already higher than the EU’s, is likely to stay at 5.25% <a href="https://www.ft.com/content/6425c756-0ff7-42f3-9022-01be30da07fd">“for an extended period of time”</a>. Inflation (on its targeted consumer price index) slowed to <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g7/mm23">4.6% in October</a>, well down from its peak above 11% in October 2022, but the average household is braced for more cost of living increases including <a href="https://www.gov.uk/government/publications/energy-bills-support/energy-bills-support-factsheet-8-september-2022">a mid-winter 5% rise</a> in the energy price cap. The recent <a href="https://www.cnbc.com/2023/10/03/sterling-had-its-worst-month-for-a-year-and-it-may-fall-further.html">weakening of the pound</a> against the dollar has also added to industries’ raw material costs, and could worsen if UK interest rates fall too soon. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/inflation-has-affected-the-uk-us-and-europe-differently-heres-what-this-means-for-interest-rates-218561">Inflation has affected the UK, US and Europe differently – here's what this means for interest rates</a>
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<h2>Recession threat isn’t over</h2>
<p>The UK economy, while hardly growing this year, has defied the Bank’s earlier <a href="https://www.bankofengland.co.uk/monetary-policy-report/2022/august-2022">forecast of a recession</a> from the end of 2022. But because this encouraged the bank into another near-doubling of base rates – from 2.25% in October 2022 to 5.25% from August 2023 – a UK recession in 2024 is still <a href="https://www.fitchsolutions.com/bmi/country-risk/uk-recession-2024-sluggish-rebound-bond-rollovers-take-their-toll-27-10-2023">expected by some commentators</a>. Unfortunately, consumer spending has been <a href="https://www.imf.org/en/Publications/selected-issues-papers/Issues/2023/07/13/Enhancing-Business-Investment-in-the-United-Kingdom-536320">less affected</a> by higher borrowing costs than private and public investment, which ultimately drive economic growth. </p>
<p>More ominously for US president Joe Biden, current interest rate patterns suggest the US could also be <a href="https://www.usbank.com/investing/financial-perspectives/market-news/treasury-yields-invert-as-investors-weigh-risk-of-recession.html">heading for recession</a> in a presidential election year. Most US GDP forecasts for 2024 remain in the 1.5-2.0% range, but that’s well down from the <a href="https://www.bea.gov/news/2023/gross-domestic-product-third-quarter-2023-advance-estimate">4.9% reached in third-quarter 2023</a>. Against this backdrop, the eurozone’s official forecast of <a href="https://economy-finance.ec.europa.eu/economic-forecast-and-surveys/economic-forecasts/autumn-2023-economic-forecast-modest-recovery-ahead-after-challenging-year_en">1.2% growth in 2024</a> could be seen as a relatively strong performance since it’s not expected to slow as much as the US is predicted to in 2024.</p>
<p>So, borrowers already hit by higher costs can expect some relief in 2024. But that’s partly due to growing concern that, with <a href="https://blogs.worldbank.org/developmenttalk/commodity-markets-outlook-eight-charts-0">falling global commodity prices</a> already helping to subdue inflation, central bankers may have applied the brakes too hard since 2022, endangering a global recovery.</p><img src="https://counter.theconversation.com/content/219857/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alan Shipman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Market expectations for rate cuts sooner rather than later have been dashed but some economies remain in danger of recession.Alan Shipman, Senior Lecturer in Economics, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2187182023-12-17T19:17:49Z2023-12-17T19:17:49ZAn austere Christmas is on the cards – but don’t say recession<p>The rapid increase in interest rates over the past year and a half is causing many consumers to feel less than joyous this festive season. </p>
<p>Spending in the lead up to Christmas is likely to remain subdued, with consumers more budget conscious than in previous years. The muted outlook for consumption has got some economists and media outlets predicting a possible recession in 2024.</p>
<p>So, what is a recession and how likely is it Australia will actually see one next year?</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/were-in-a-per-capita-recession-as-chalmers-says-gdp-steady-in-the-face-of-pressure-212642">We're in a per capita recession as Chalmers says GDP 'steady in the face of pressure'</a>
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<h2>What is a recession, anyway?</h2>
<p>The National Bureau of Economic Research (a private research organisation widely seen as the authority for determining recessions in the US) <a href="https://www.nber.org/research/business-cycle-dating/business-cycle-dating-procedure-frequently-asked-questions">defines</a> recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”</p>
<p>But it is not all just about weak consumption expenditure (people spending a bit less money than usual). In an open economy like Australia, a decline in consumption could just mean a decline in imports. In other words, weak consumption doesn’t necessarily mean we are producing less goods and services locally.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/564723/original/file-20231211-23-rwk6l5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A couple of sad looking presents are placed around a very small Christmas tree." src="https://images.theconversation.com/files/564723/original/file-20231211-23-rwk6l5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/564723/original/file-20231211-23-rwk6l5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/564723/original/file-20231211-23-rwk6l5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/564723/original/file-20231211-23-rwk6l5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/564723/original/file-20231211-23-rwk6l5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/564723/original/file-20231211-23-rwk6l5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/564723/original/file-20231211-23-rwk6l5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">We may be in for an austere Christmas.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/vintage-house-decorated-small-christmas-tree-1935574153">Shutterstock</a></span>
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<p>The Reserve Bank of Australia <a href="https://www.rba.gov.au/education/resources/explainers/recession.html">says</a> a recession is often defined as “a sustained period of weak or negative growth.”</p>
<p>But what do we mean by “sustained”? The media usually takes this to mean at least two consecutive quarters of negative growth in economic activity, typically measured by Gross Domestic Product (GDP). </p>
<p>However, the National Bureau of Economic Research does not use a two-quarter rule. And it looks at more than just domestic production. It examines a variety of different measures of economic activity – such as conditions in the labour market and industrial production – when making its decision about whether a recession has occurred or not.</p>
<p>Currently, there seems to an obsession with finding some measure that will indicate a recession. The latest candidate, popular among some observers and <a href="https://www.afr.com/policy/economy/the-big-squeeze-we-had-to-have-20230906-p5e2b8">media</a> <a href="https://theconversation.com/were-in-a-per-capita-recession-as-chalmers-says-gdp-steady-in-the-face-of-pressure-212642">outlets</a>, is a “per capita GDP recession”. </p>
<p>This means a fall in GDP per person. That’s an easier set of criteria to meet, so if you go by this definition, a recession is more likely.</p>
<p>Other economists and observers shy away from focusing on economic growth, saying the change in the unemployment rate is a better measure. These people believe a higher unemployment rate provides a better sign a recession has occurred.</p>
<p>The problem is, however, there can be other factors that weaken the link between the labour market and economic activity. Institutional changes to the labour market is one example. The decline in activity in 2008–2009, for instance, showed up as a decline in hours worked rather than an increase in unemployment, something that would not have occurred previously.</p>
<p>Even just using the “technical” definition (the two quarter rule) of a recession has its problems too. This is because of the issue of data revisions to measures of economic activity such as GDP.</p>
<p>The Australian Bureau of Statistics frequently revises historical values of GDP as new data become available. As a result, a negative quarterly growth outcome in one period can be revised away by the bureau in a subsequent period.</p>
<h2>Take any recession warnings with a grain of salt</h2>
<p>In the past, from about the 1960s to the 1980s, recessions were more frequent in Australia. But they are less likely now. This is partly because the frequency and volatility of shocks has declined since the mid-1980s. </p>
<p>A series of economic reforms that occurred in the 1980s and 1990s, such as floating the dollar and opening the economy up to greater competition, has also helped reduce the risk of recession. These changes have made Australia more robust to shocks.</p>
<p>We should be sceptical of anyone claiming a recession is just around the corner. Economists have a <a href="https://www.afr.com/markets/equity-markets/economists-are-terrible-at-predicting-recessions-20190812-p52g8r">terrible</a> <a href="https://www.bloomberg.com/news/articles/2019-03-28/economists-are-actually-terrible-at-forecasting-recessions">track</a> <a href="https://fivethirtyeight.com/features/economists-are-bad-at-predicting-recessions/">record</a> when it comes to predicting recessions.</p>
<p>To forecast a recession, we need to be able predict “turning points” – periods when economic activity goes from positive growth to negative growth or vice versa. This requires us to predict future shocks, like the outbreak of COVID, which is hard to do consistently.</p>
<p>There will always be some probability of a recession in Australia when a very large shock hits us. But our ability to successfully predict when one will occur is poor.</p>
<p>Any prediction Australia is on the cusp of recession should be taken with a grain of salt.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/im-an-expert-in-diplomatic-gift-giving-here-are-my-5-top-tips-for-the-best-christmas-present-exchange-218819">I’m an expert in diplomatic gift giving. Here are my 5 top tips for the best Christmas present exchange</a>
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<img src="https://counter.theconversation.com/content/218718/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Luke Hartigan receives funding from the Australian Research Council. He previously worked as an economist at the Reserve Bank of Australia.</span></em></p>We should be sceptical of anyone claiming a recession is just around the corner.Luke Hartigan, Lecturer in Economics, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2166532023-10-31T12:56:38Z2023-10-31T12:56:38ZInterest rates: if central banks don’t start cutting them soon, it could actually increase inflation<figure><img src="https://images.theconversation.com/files/556622/original/file-20231030-15-ssa8rd.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Another reason to be fearful. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/businessman-walking-on-abstract-growing-interest-2126771846">Golden Dayz</a></span></figcaption></figure><p>What next for interest rates? The Bank of England’s Monetary Policy Committee (MPC) is <a href="https://www.ft.com/content/2b0dcf95-b4ee-4eee-ad39-a7f5f3fbed3e">widely expected</a> to leave them unchanged when it meets on November 2, despite the fact that UK headline inflation is still at 6.7%. If so, it will mark the second monthly freeze in a row, following 14 consecutive hikes dating back to late 2021. </p>
<p>The main argument for pausing when inflation is still high is that each rise takes time to have full effect. It’s possible that the brakes have already been pressed far enough, and that any <a href="https://www.schroders.com/en-gb/uk/institutional/insights/uk-should-brace-for-6-5-interest-rates-here-s-why-we-ve-raised-our-forecast/">further rate rise</a> could push the economy into recession. The MPC <a href="https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2023/september-2023">said as much</a> in its rationale for the September hold. </p>
<p>While higher interest rates subdue inflationary pressure by reducing the amounts that people borrow and spend, households and businesses don’t feel the effect immediately. This is because they have either not borrowed or fixed their interest rates at a lower level. When those fixed-rate periods end, these borrowers will join the many who must already channel more of their income into interest payments, leaving less to buy other things.</p>
<p>The <a href="https://www.ons.gov.uk/peoplepopulationandcommunity/housing/articles/howincreasesinhousingcostsimpacthouseholds/2023-01-09">Bank of England (BoE) estimated</a> in January that more than 1.4 million out of the <a href="https://www.ukfinance.org.uk/news-and-insight/press-release/uk-finance-mortgage-data#:%7E:text=There%20are%20a%20total%20of,if%20the%20Bank%20Rate%20rises.&text=There%20are%20a%20total%20of%202%2C033%2C512%20buy%20to%20let%20mortgages,also%20being%20on%20fixed%20rates.">total of 8.5 million</a> mortgage borrowers in the UK would see interest rates jump during 2023, as they move off fixed rates that were mostly below 2%. Another 1.6 million <a href="https://www.theguardian.com/money/2023/jun/17/uk-homeowners-face-huge-rise-in-payments-when-fixed-rate-mortgages-expire#:%7E:text=In%20total%2C%20up%20to%204.4,and%20the%20end%20of%202024.">are also expected</a> to have to remortgage in 2024. Meanwhile, even debt-free businesses will find their income reduced as customers who need credit find it’s costing them more.</p>
<h2>Alternative arguments</h2>
<p>Additional pressures to avoid any further interest rate rises are now evident. <a href="https://www.levyinstitute.org/publications/in-defense-of-low-interest-rates">Some economists doubt</a> that raising rates has had much effect against <a href="https://theconversation.com/inflation-raising-interest-rates-was-never-the-right-medicine-heres-why-central-bankers-did-it-anyway-216087">today’s inflation</a> because it has largely been caused, not by an overheating economy, but by scarcity of goods and commodities due to the Ukraine war and opening up after the pandemic. </p>
<p>Still others point to evidence that rises in interest rates are followed by <em>higher</em> inflation. This has been found in <a href="https://www.nber.org/system/files/working_papers/w23977/w23977.pdf">recent studies</a> of the US and Japan, and some lower-income economies such as <a href="https://intapi.sciendo.com/pdf/10.2478/jcbtp-2018-0019">Brazil and Indonesia</a>. To understand this, you need to grasp a standard economic theory called the “<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3349096">Fisher effect</a>”, named after an early 20th century American economist called <a href="https://en.wikipedia.org/wiki/Irving_Fisher">Irvine Fisher</a>. It suggests that economies have an equilibrium “real” interest rate, measured by the interest rate minus inflation.</p>
<p>For example, if a high-street bank offers one-year loans at 5% and annual inflation jumps from 3% to 5%, the bank has less incentive to lend at the same rate because the amount it gets back at the end of the year will be worth less than before. For the same reason, households and firms are dissuaded from saving. They are reacting to the fact that “real” interest rates have fallen. To keep lending and saving on track – in other words, to keep the economy running as normal – the central bank must raise the headline interest rate. </p>
<p><strong>UK interest rate vs inflation</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/556624/original/file-20231030-17-iur9lv.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph showing 25 years of inflation and interest rates in the UK" src="https://images.theconversation.com/files/556624/original/file-20231030-17-iur9lv.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/556624/original/file-20231030-17-iur9lv.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=350&fit=crop&dpr=1 600w, https://images.theconversation.com/files/556624/original/file-20231030-17-iur9lv.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=350&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/556624/original/file-20231030-17-iur9lv.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=350&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/556624/original/file-20231030-17-iur9lv.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=440&fit=crop&dpr=1 754w, https://images.theconversation.com/files/556624/original/file-20231030-17-iur9lv.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=440&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/556624/original/file-20231030-17-iur9lv.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=440&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Inflation (orange) is consumer price inflation. Interest rates (blue) are the Bank of England benchmark rate.</span>
<span class="attribution"><a class="source" href="https://www.tradingview.com/symbols/SPX/?exchange=SP">Trading View</a></span>
</figcaption>
</figure>
<p>Some of this <a href="https://www.stlouisfed.org/publications/regional-economist/july-2016/neo-fisherism-a-radical-idea-or-the-most-obvious-solution-to-the-low-inflation-problem#fig1">research also suggests</a> there is a two-way causation. Not only do interest rates need to rise in response to inflation, they can also pull inflation upwards – precisely the opposite of what the monetary policymakers intend. This becomes a risk when interest rates are expected to stay high. Businesses then push up their prices, and households raise their wage demands, to cover their increased borrowing costs, and the expectation is fulfilled as central banks are forced to keep rates high. </p>
<p>Rate rises can still be effective if they reduce inflation quickly, allowing them to fall back to previous levels before expectations change. The International Monetary Fund, which often represents the economic mainstream, has <a href="https://www.imf.org/en/Blogs/Articles/2023/04/10/interest-rates-likely-to-return-towards-pre-pandemic-levels-when-inflation-is-tamed">conveyed the view</a> that global interest rates will drop back to pre-pandemic levels once the present inflation wave has passed.</p>
<p>But other experts, including the Bank of England’s chief economist, <a href="https://www.reuters.com/world/uk/boe-will-see-job-through-inflation-pill-says-2023-08-31/">Huw Pill</a>, believe interest rates must stay elevated for a longer time to ensure inflation is crushed. Some even argue that they should now stabilise close to present levels, as a reset from the exceptional 13 years in which they stayed close to zero after the global financial crisis of 2007-09. </p>
<p><strong>UK real interest rates 2000-22</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/557268/original/file-20231102-23-fzu1md.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Chart showing real interest rates since 2000" src="https://images.theconversation.com/files/557268/original/file-20231102-23-fzu1md.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/557268/original/file-20231102-23-fzu1md.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=300&fit=crop&dpr=1 600w, https://images.theconversation.com/files/557268/original/file-20231102-23-fzu1md.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=300&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/557268/original/file-20231102-23-fzu1md.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=300&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/557268/original/file-20231102-23-fzu1md.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=377&fit=crop&dpr=1 754w, https://images.theconversation.com/files/557268/original/file-20231102-23-fzu1md.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=377&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/557268/original/file-20231102-23-fzu1md.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=377&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp">BoE/ONS</a></span>
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<p><a href="https://www.jrf.org.uk/press/interest-rate-hike-will-have-serious-consequences-low-income-families">The risks</a> of keeping interest rates at their present high level extend further than the possibility of causing recession, and worsening misery for the poorest borrowers, without taming inflation. A rise in interest rates means <a href="https://knowablemagazine.org/article/society/2022/the-obscure-calculation-transforming-climate-policy">investors become</a> more short-termist – increasing their focus on immediate costs and putting less value on potential gains further into the future. Especially when we need many billions of dollars of investment to build the green economy, a shortfall caused by high interest rates could have ramifications for the future of the planet.</p>
<p>Besides that concern, production capacity will only grow slowly across the board if investment is choked off. That is likely to be another source of inflationary pressure, if central banks don’t start to reverse the rise in interest rates early next year.</p><img src="https://counter.theconversation.com/content/216653/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alan Shipman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>So you thought raising interest rates brought down inflation? The reality is a bit more debatable.Alan Shipman, Senior Lecturer in Economics, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2147232023-10-17T17:55:52Z2023-10-17T17:55:52ZNZ election 2023: Labour out, National in – either way, neoliberalism wins again<p>For an election ostensibly fought over a “cost-of-living crisis”, there was a strong unspoken consensus between the two major parties: most people’s living standards needed to reduce to thwart inflation. Regardless of the election result, a form of austerity was always going to win.</p>
<p>Both National and Labour essentially agreed with the Reserve Bank hiking interest rates to bring down inflation – a crude market discipline likely to <a href="https://www.stuff.co.nz/business/money/300849075/ocr-hike-do-74000-people-really-have-to-lose-their-jobs-to-save-economy">cause redundancies</a>, suppress wages, and increase debt and inequality. </p>
<p>Such policies – classically <a href="https://www.investopedia.com/terms/n/neoliberalism.asp">neoliberal</a>, specifically <a href="https://www.investopedia.com/terms/m/monetarism.asp">monetarist</a> – are presented as if there is no alternative. Yet other countries have successfully used <a href="https://www.theguardian.com/commentisfree/2023/aug/03/spain-inflation-lower-bank-england-interest-rates">other measures</a> to protect living standards, including wealth taxes, rent caps, windfall taxes on excessive profits, and major subsidies on energy payments.</p>
<p>While National and Labour both offered targeted support for those struggling to get by, such as tax cuts (National) or the removal of GST from fruit and vegetables (Labour), such mitigation seems paltry by comparison. </p>
<p>Only smaller parties, notably the Greens and Te Pāti Māori, offered policies aimed at changing fundamental economic settings.</p>
<h2>Radical incrementalism?</h2>
<p>Of course, there were and are important differences between Labour and National. Many contend Labour has abandoned the free-market fundamentalism associated with “<a href="https://nzhistory.govt.nz/culture/the-1980s/overview">Rogernomics</a>” that it adopted in the 1980s.</p>
<p>Under the Labour governments led by Jacinda Ardern and then Chris Hipkins, there was an attempt to ameliorate the worst excesses of market capitalism. </p>
<p>Hipkins, for instance, insisted Labour’s policies were not simply about “tinkering around the edges of the neoliberal model”. He spoke of “<a href="https://www.wgtn.ac.nz/igps/commentaries/1741419-jacinda-ardern-transforms-new-zealand">radical incrementalism</a>” – allowing a government to “do big change”.</p>
<p>In that light, the 2017-23 Labour government lifted the minimum wage, introduced fair pay agreements, built state houses, increased <a href="https://www.ird.govt.nz/working-for-families">Working for Families</a> wage subsidies, and intervened during a pandemic and natural disasters to support people and jobs. </p>
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Read more:
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<p>Labour also reformed the Reserve Bank’s targets to include “<a href="https://www.rbnz.govt.nz/monetary-policy/about-monetary-policy/maximum-sustainable-employment">maximum sustainable employment</a>”, alongside the bank’s traditional goal of keeping inflation within a 1–3% band.</p>
<p>Beyond Aotearoa New Zealand, neoliberalism’s demise was proclaimed in the aftermath of the 2007-09 global financial crisis, as governments everywhere shored up the financial sector. </p>
<p>The obituaries have increased since the COVID pandemic. In the United States, Joe Biden’s preference for public investment prompted <a href="https://nymag.com/intelligencer/2023/05/biden-just-declared-the-death-of-neoliberalism.html">one commentator to claim</a> the president had “declared the death of neoliberalism”.</p>
<h2>The ‘third way’</h2>
<p>Given the Labour government’s track record, then, it might seem unfair to label it a neoliberal administration. But I think such reasoning is mistaken on several counts. </p>
<p>A rough scholarly consensus has emerged that neoliberalism has shown a <a href="https://onlinelibrary.wiley.com/doi/10.1111/j.1471-0374.2009.00277.x">remarkable ability to evolve</a>. Labour – and to some extent National – have rejected the harsh “vanguard neoliberalism” of the 1980s and ‘90s. Instead, they have embraced the mild neoliberalism of “<a href="https://www.worldcat.org/title/prosperity-for-all-economic-social-and-political-change-in-new-zealand-since-1935/oclc/62616738">third way</a>” politics since 1999.</p>
<p>Sometimes called the “post-Washington consensus”, third way economics accepts the need for some government intervention in the market, something the more hardline “<a href="https://www.piie.com/blogs/realtime-economic-issues-watch/what-washington-consensus">Washington consensus</a>” of the late 1980s did not. </p>
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Read more:
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<p>Yet under this softer form of neoliberalism, governments do not intervene to genuinely redistribute wealth. Instead, they act to <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/dech.12645">temporarily support business</a> during crises.</p>
<p>For example, the Labour government’s COVID business support and wage subsidy scheme was supposedly undertaken to protect workers from unemployment. </p>
<p>In reality, it facilitated a massive upward transfer of wealth by subsidising businesses, and boosting house prices and private savings. That wealth transfer amounted to about NZ$1 trillion, <a href="https://www.1news.co.nz/2021/12/13/wealthy-nearly-1-trillion-richer-since-covid-began-hickey/">according to economic commentator</a> Bernard Hickey.</p>
<p>Hickey <a href="https://thekaka.substack.com/p/when-a-5-fee-costs-us-all-265-billion#details">also argued</a> governments of both stripes have effectively cut social services such as housing, health and education in real per-capita terms, as the population has increased. For the most part, increased funding has not stayed level with inflation.</p>
<p>We might call this austerity by stealth, with one example being the <a href="https://www.newsroom.co.nz/ideasroom/the-crisis-in-tertiary-education-caused-by-inadequate-funding">current funding crisis</a> in tertiary education that has resulted in many job cuts.</p>
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<h2>Intervention <em>for</em> the market</h2>
<p>In this sense, the various palliative reforms made by the Ardern-Hipkins governments do not represent a fundamental swing away from neoliberalism. Crucially, both prime ministers ruled out any kind of wealth or capital gains tax, and generally kept tax levels low (despite a small increase in the highest income tax rate). </p>
<p>Tellingly, the US Heritage Foundation – a think tank devoted to the “principles of free enterprise, limited government [and] individual freedom” – still <a href="https://www.heritage.org/index/country/newzealand">ranks New Zealand fifth</a> in its global “index of economic freedom”. </p>
<p>While Labour’s Reserve Bank reforms appeared to modify its monetary priorities to maximise sustainable employment, its <a href="https://www.stuff.co.nz/business/130568638/adrian-orr-admits-reserve-bank-is-deliberately-engineering-recession">governor admitted</a> raising interest rates to control inflation was deliberately engineering a recession, with a likely rise in unemployment.</p>
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Read more:
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<p>Before becoming prime minister in 2017, <a href="https://www.stuff.co.nz/national/politics/96739673/jacinda-ardern-says-neoliberalism-has-failed">Ardern agreed</a> with the view of previous National prime minister Jim Bolger that neoliberalism had failed. She said Labour accepted the need for government intervention in the market.</p>
<p>This might qualify as a rejection of neoliberalism if we define it only as a set of ideas or policies designed to “hollow out the state” and promote free-market, individualistic competition.</p>
<p>But there is another view of neoliberalism, put forward by historian Quinn Slobodian and other scholars, that it was never about rejecting big government. Rather, at its core, it is about imposing a global and state framework that <a href="https://www.dissentmagazine.org/article/neoliberalism-world-order-review-quinn-slobodian-globalists/">favours business and private property</a>. </p>
<p>To achieve this, they argue, the state restricts democracy, trade unions and community interest groups from achieving genuine improvements in ordinary people’s lives. Slobodian sees neoliberalism as involving “re-regulation” rather than deregulation.</p>
<h2>The underlying consensus</h2>
<p>None of this means Labour and National mirror each other. Labour is more centrist, more committed to maintaining public services. National is more business-friendly and seems poised to make deeper cuts to public services. </p>
<p>To differing degrees, National and its probable coalition partner ACT reject the “progressive” aspects of what feminist scholar Nancy Fraser called “<a href="https://www.dissentmagazine.org/online_articles/progressive-neoliberalism-reactionary-populism-nancy-fraser/">progressive neoliberalism</a>”. They aim to roll back most of Labour’s incremental reforms, and are aligned in their opposition to what they see as excessive government spending and regulation.</p>
<p>But beneath those apparent ideological differences there remains an underlying neoliberal consensus. Roughly speaking, this compact aims to keep taxes low, push for free trade agreements, maintain a largely deregulated business sector, enable financial speculation, and use interest rates to combat inflation.</p>
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Read more:
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<p>Above all, the goal is to be “fiscally responsible” by keeping government spending tight and the debt-to-GDP ratio low. Austerity is the means by which this is achieved, whether by stealth or through more upfront cuts.</p>
<p>It was perhaps predictable that governments everywhere would revert to austerity to pay down debts incurred during the pandemic. But those same governments are also struggling with broader economic, climate, housing, health and education crises.</p>
<p>Wars and political polarisation generally have added to a sense that neoliberalism’s hegemony is fraying. There has been a trend towards more <a href="https://www.gu.se/en/news/the-world-is-becoming-increasingly-authoritarian-but-there-is-hope">nationalist and authoritarian</a> government – although not yet in Aotearoa New Zealand to any great extent.</p>
<p>Given we are now seeing living standards squeezed to combat inflation, and government austerity to pay off COVID debts, neoliberalism still seems embedded in the political and economic fabric of Aotearoa. This is especially so with the election success of parties promising to reduce government spending.</p><img src="https://counter.theconversation.com/content/214723/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Toby Boraman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Beneath the obvious policy differences between Labour and National lies a tacit consensus on fundamental economic settings. Until that changes, political choice will be constrained.Toby Boraman, Lecturer in Politics, Massey UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2135372023-09-28T19:45:31Z2023-09-28T19:45:31ZInterest rates: Monetary policy is always political as central banks opt to back the financial sector<iframe style="width: 100%; height: 100px; border: none; position: relative; z-index: 1;" allowtransparency="" allow="clipboard-read; clipboard-write" src="https://narrations.ad-auris.com/widget/the-conversation-canada/interest-rates-monetary-policy-is-always-political-as-central-banks-opt-to-back-the-financial-sector" width="100%" height="400"></iframe>
<p>As the Bank of Canada prepared to announce its decision on interest rates in early September, Tiff Macklem, the bank’s governor, <a href="https://www.theglobeandmail.com/business/article-ontario-bc-premiers-urge-bank-of-canada-to-halt-rate-hikes-ahead-of/">received imploring letters</a> from premiers spanning both the country and the political spectrum. </p>
<p>New Democrat <a href="https://www.cbc.ca/news/canada/british-columbia/david-eby-open-letter-bank-of-canada-halt-interest-rate-1.6953609">David Eby</a> of British Columbia wrote to the Bank of Canada, followed by Ontario’s <a href="https://www.cbc.ca/news/canada/toronto/doug-ford-letter-bank-of-canada-1.6956538">Doug Ford</a>, a Conservative, and by Liberal <a href="https://www.cbc.ca/news/canada/newfoundland-labrador/furey-bank-of-canada-interest-rates-inflation-1.6957762">Andrew Furey</a> of Newfoundland and Labrador. </p>
<p>In their letters, the premiers urged the bank against raising rates again and to think of the “human impact of rate increases” on Canadians already burdened by rising mortgage payments and financial pain. </p>
<p>When Macklem announced he was holding the rate at five per cent, Finance Minister <a href="https://www.cbc.ca/news/politics/freeland-bank-of-canada-interest-inflation-1.6958163">Chrystia Freeland </a> called the decision “a welcome relief for Canadians.” </p>
<p>Facing subsequent accusations from economists and journalists that she was meddling, Freeland <a href="https://twitter.com/paulvieira/status/1699513857142607935">made clear</a> a few hours later that she respected the independence of the Bank of Canada.</p>
<h2>Social impact of monetary policy</h2>
<p>But the criticism raises important questions. Is monetary policy really outside the realm of politics? What are the social ramifications of our current monetary policy system? </p>
<p>The view that central banks should be independent of politics has <a href="https://www.clevelandfed.org/publications/economic-commentary/2007/ec-20071201-a-brief-history-of-central-banks">shifted many times</a> over the history of central banks. </p>
<p>While central bank decision-making is independent from government, the banks follow mandates set by governments. These mandates vary in different countries. </p>
<p>The United States Federal Reserve (the Fed), for example, has a dual mandate: to manage inflation and pursue maximum stable employment. The Bank of Canada’s mandate, by contrast, is focused entirely on managing inflation, with <a href="https://sites.lsa.umich.edu/mje/2023/09/04/why-the-2-inflation-target/">an arbitrary</a> target of two per cent. </p>
<p>In theory, central banks pursue these goals without interference from government. </p>
<p>But we don’t believe political debates over monetary policy should be off limits.</p>
<h2>Ties between politics and monetary policy</h2>
<p>In the 1970s, Fed chairman Paul Volcker famously used monetary policy — specifically a campaign of rapid interest rate increases — <a href="https://www.thebignewsletter.com/p/on-the-tragedy-of-paul-volcker">to erode the bargaining power of labour</a> as a means of taming inflation. </p>
<p>That decision had wide-ranging effects — including a reduction in union membership — that continue to have an impact on American society and placed the burden of fighting inflation onto <a href="https://www.thenation.com/article/economy/volcker-inflation-economy/">the working class</a>.</p>
<p>This logic continues, crudely captured in a recent viral video when Australian real estate developer <a href="https://www.bbc.com/news/business-66803279">Tim Gurner argued</a>:</p>
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<p>“We need to see unemployment rise, we need to see pain in the economy … to remind people that they work for the employer, not the other way around.” </p>
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<p>In more polite language, Phillip Lowe, outgoing governor of Australia’s central bank, recently acknowledged that the effects of monetary policy are <a href="https://www.theguardian.com/australia-news/2023/sep/07/outgoing-rba-governor-philip-lowe-says-tough-decisions-made-him-very-unpopular">“felt unevenly across the community</a>.” </p>
<h2>The scene in Canada</h2>
<p>According to <a href="https://doi.org/10.1093/cjres/rsac040">our research</a>, monetary policy likewise has an impact on wealth inequality in Canada by supporting the financial sector over other parts of the economy. </p>
<p>Indeed, the overt goal of monetary policy is to stabilize the financial system, a priority that disproportionately benefits those in the financial sector.</p>
<p>This has become clear in recent decades, beginning with the <a href="https://www.britannica.com/money/topic/financial-crisis-of-2007-2008">2008 global financial crisis</a> and continuing to the COVID-19 pandemic, when <a href="https://www.bankofcanada.ca/2022/06/understanding-quantitative-easing/">central banks around the world began to use “quantitative easing”</a> to stimulate the economy. </p>
<p>While monetary policy had previously centred on setting the rates at which regulated banks could borrow, central banks expanded their role by undertaking massive asset purchasing campaigns via quantitative easing.</p>
<p>Central banks began supporting not just regulated banks but investment funds, hedge funds and other “<a href="https://www.bankofcanada.ca/2023/03/staff-discussion-paper-2023-6/">non-bank financial intermediaries</a>” — also known as shadow banks — that are largely unregulated.</p>
<p>This involved tactics like <a href="https://www.bankofcanada.ca/markets/market-operations-liquidity-provision/market-operations-programs-and-facilities/corporate-bond-purchase-program/">purchasing corporate bonds</a> to stabilize the corporate debt market. </p>
<h2>Investors benefit</h2>
<p>These new Bank of Canada policies grant <a href="https://crashcourseeconomics.org/webinar/central-banking-finance-and-power">“infrastructural power”</a> over how monetary policy is implemented to the financial sector, buttressing the profits of investors with public dollars. This allows investors to determine how the capital provided by the bank will be invested — with little regulation or public oversight.</p>
<p>Acknowledging this shift, Bank of Canada deputy governor <a href="https://www.bankofcanada.ca/wp-content/uploads/2021/03/remarks-2021-03-23.pdf">Toni Gravelle</a> said the bank has moved from its traditional role as “lender of last resort” to “liquidity provider of last resort,” promising to “resolve market-wide stresses when the financial system cannot find its footing.”</p>
<p>When the working class cannot “find its footing,” however, the Bank of Canada doesn’t extend a helping hand. In 2022, for example, Macklem <a href="https://www.theglobeandmail.com/business/article-wage-negotiations-inflation-canada/">told employers not to increase wages</a> despite rampant inflation, and told unionized workers not to ask for a raise. </p>
<p>The central bank’s decision to support the financial sector is, in fact, political. It benefits some — financial sector executives and investors — at the expense of others, and tilts economic decision-making in their favour.</p>
<p>When a public institution buys hundreds of billions in assets as the Bank of Canada did in <a href="https://www.bankofcanada.ca/rates/banking-and-financial-statistics/bank-of-canada-assets-and-liabilities-month-end-formerly-b1/">March 2020</a>, Canadians are right to ask questions about its impact, and politicians should respond.</p>
<h2>Enriching the already rich</h2>
<p>The premiers’ letters to the Bank of Canada, <a href="https://globalnews.ca/news/9931842/bc-premier-david-eby-freeze-interest-rates/">while described as unprecedented</a>, expose how monetary policy involves fundamentally political questions about the distribution of wealth in our society. </p>
<p>As we demonstrated in <a href="https://doi.org/10.1093/cjres/rsac040">our research</a>, the Bank of Canada’s quantitative easing tactics during the pandemic had a vastly uneven impact, driving up house prices and enriching already wealthier homeowners, while lower-income households and renters faced higher rents and precarity. </p>
<p>It also helped investors <a href="https://www.theglobeandmail.com/business/article-investors-account-for-30-per-cent-of-home-buying-in-canada-data-show/">who took advantage of cheap capital and rising asset values</a> to scoop up multi-family apartments and houses in Canada. </p>
<p>The impact doesn’t stop at housing. As inflation rose, central banks hiked interest rates, assuming that would boost unemployment, reduce labour costs and slow the economy so that inflation would fall. </p>
<p>But at a time when the causes of inflation are highly contested (there are ongoing debates around <a href="https://www.frbsf.org/economic-research/publications/economic-letter/2023/june/global-supply-chain-pressures-and-us-inflation/">supply chain disruptions</a> and “<a href="https://doi.org/10.4337/roke.2023.02.05">sellers inflation,”</a> for example) choosing to focus on wages is political. </p>
<h2>What should central banks do?</h2>
<p>Where does this leave us in terms of the politics of monetary policy and central bank independence? </p>
<p>While central bank decisions may need to be independent of government influence, the factors banks consider are determined by our political systems. </p>
<p>Central banks could consider factors that benefit workers and people who don’t own assets — from maximizing employment to promoting housing affordability and addressing climate change risks.</p>
<p>European Central Bank president <a href="https://greencentralbanking.com/2022/11/14/ecb-climate-price-stability-mandate-christine-lagarde/">Christine Lagarde</a>, for example, has said climate change should factor into central bank decision-making. </p>
<p>Others argue monetary policy can be used to <a href="https://greencentralbanking.com/research/targeting-a-sustainable-recovery-with-green-tltros/">fund the green transition</a>, building on the <a href="https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2364%7E12a4540091.en.pdf">European Central Bank’s practice of using targeted loans to influence the financial sector</a> rather than leaving decision-making in the hands of financial institutions.</p>
<p>Given the connection between monetary policy and inequality, it’s time for a serious debate on why central banks use public institutions to support private finance — and what they should be doing differently.</p>
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<p><em>The authors would like to acknowledge and thank research assistant Yun Liu for her work on this article.</em></p><img src="https://counter.theconversation.com/content/213537/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dan Cohen receives funding from the Social Sciences and Humanities Research Council</span></em></p><p class="fine-print"><em><span>Martine August receives funding from the Social Sciences and Humanities Research Council of Canada (SSHRC), and the Government of Ontario. </span></em></p><p class="fine-print"><em><span>Emily Rosenman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Why is monetary policy outside the realm of politics? What are the social ramifications of our current monetary policy system? What alternatives exist?Dan Cohen, Assistant Professor, Queen's University, OntarioEmily Rosenman, Assistant Professor of Geography, Penn StateMartine August, Associate Professor, School of Planning, University of WaterlooLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2126422023-09-06T06:15:02Z2023-09-06T06:15:02ZPer capita recession as Chalmers says GDP ‘steady in the face of pressure’<p>Australia’s economy grew a mere <a href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/jun-2023">0.4%</a> in the June quarter according to figures released by the Bureau of Statistics on Wednesday, a performance Treasurer Jim Chalmers describes as “steady in the face of unrelenting pressure”.</p>
<p>The lacklustre growth follows growth of 0.4% the previous quarter, and is a step down from the growth of 0.7% in the quarters that preceded it, presenting a stark reminder of the economic challenges caused by rising interest rates as the Reserve Bank attempts to reign in inflation.</p>
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<p>If growth continued at that pace for another two quarters, the annual growth rate would barely reach 1.6%, an alarmingly low figure that. For many Australians it probably feels like a recession, because all of the growth was accounted for by population growth, meaning gross domestic product (GDP) per person fell by 0.3% in both March and the June quarters, in a so-called “<a href="https://www.amp.com.au/content/dam/amp-au/documents/insights/recession-risk-oi-16-2023v2.pdf">per capita recession</a>”.</p>
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<p>The driving force behind this tepid growth is primarily weak household consumption which grew by only 0.1% in the quarter – far less than Australia’s population. </p>
<p>Households, grappling with the increased cost of essential expenses such as fuel and rent, have resorted to cutting down on savings. </p>
<p>In the three months to June Australia’s household saving ratio plummeted to 3.2%, its lowest rate in 15 years.</p>
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<p>How is it possible to have both weak spending and weak saving at the same time? </p>
<p>The answer is that disposable (post tax) income fell by even more. </p>
<p>Real per capita disposable income fell by 2.1% in the June quarter. </p>
<p>Outside of pandemic lockdown years of 2020 and 2021, this was the biggest fall in disposable income per Australian since the 2009 global financial crisis.</p>
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<p>The Bureau of Statistics says mortgage interest expenses have almost doubled over the past year as home building (“dwelling investment”) has slid by 0.2% in the quarter and 1.1% over the year. </p>
<p>In better news, business investment has shown resilience, climbing 0.6% in the quarter, and 3.4% over the year driven, driven in part by a <a href="https://www.afr.com/policy/economy/investment-jumps-as-tradies-rush-on-ute-tax-break-20230831-p5e0z1">rush of tradies</a> attempting to upgrade their cars before a cut in the instant asset write-off limit came into effect on July 1.</p>
<p>Exports climbed 4.3% in the quarter, driven by “education exports” as international students returned.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/you-dont-have-to-be-an-economist-to-know-australia-is-in-a-cost-of-living-crisis-what-are-the-signs-and-what-needs-to-change-210373">You don't have to be an economist to know Australia is in a cost of living crisis. What are the signs and what needs to change?</a>
</strong>
</em>
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<p>Gross operating surpluses, a measure of company profits, fell by 8.6% in the quarter driven by a fall in commodity prices which drove down mining profits.</p>
<p>Pressing on profits were higher wage bills – which surged 9.9% outside of mining, reflecting both wage growth and employment growth, outstripping the 5.1% uptick in non-mining profits.</p>
<p>Lower commodity prices also drove another decline in Australia’s terms of trade which fell by 7.9%. The terms of trade measure the price of Australian’s exports relative to the price of imports, meaning that Australia is getting fewer imports for its exports – something that will inevitably feed into our standard of living.</p>
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<p>This subdued economic growth is the primary reason the Reserve Bank decided to hold interest rates <a href="https://www.rba.gov.au/media-releases/2023/mr-23-23.html">constant</a> at its board meeting yesterday. </p>
<p>The bank is expecting economic growth to decelerate to an annual rate of only <a href="https://www.rba.gov.au/publications/smp/2023/aug/pdf/forecast-table-2023-08.pdf">0.9%</a> by the end of the year, in large measure because of the series of 12 interest rate rises it has imposed since May last year.</p>
<p>One of the bank’s biggest concerns, and one of the government’s biggest concerns, is labour productivity (GDP per hour worked) which slid a further 2% in the quarter to be down <a href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/jun-2023">3.6%</a> over the year. </p>
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<p>The bank’s outgoing governor Philip Lowe says falling or weak productivity growth makes wage increases more likely to feed inflation, limiting his freedom to cut interest rates, a point he might address in his final speech as governor on Thursday, to be entitled <a href="https://rba.livecrowdevents.tv/SpeechbyPhilipLoweGovernorAnikaFoundation7sept">Some Closing Remarks</a>.</p>
<p>Boosting productivity – how much we produce for each hour we work – is important. Our standard of living and the pain we need to inflict to fight inflation will depend on it.</p><img src="https://counter.theconversation.com/content/212642/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Isaac Gross does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Six charts explain the Australian economy. Three of the most disturbing show living standards going backwards, productivity collapsing and household saving falling to a 15-year low.Isaac Gross, Lecturer in Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2126782023-09-01T15:41:04Z2023-09-01T15:41:04ZJobs are up, wages less so – and lower purchasing power could still lead the US into a recession<figure><img src="https://images.theconversation.com/files/545977/original/file-20230901-25275-sig91v.jpg?ixlib=rb-1.1.0&rect=17%2C0%2C5631%2C3771&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Economists are feeling dismal for a reason.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/man-with-empty-wallet-royalty-free-image/80992590">IS/Getty Images</a></span></figcaption></figure><p>Don’t be overly fooled by seemingly rosy jobs data heading into the Labor Day weekend.</p>
<p>Yes, the <a href="https://www.bls.gov/news.release/empsit.nr0.htm">U.S. economy added 187,000 jobs in August 2023</a> – faster than the revised 157,000 increase for July and above most <a href="https://www.morningstar.com/markets/august-jobs-report-forecasts-predict-strong-cooling-growth">analysts’ expectations for the month</a>. And yes, gains were seen across most industries, with health care and social assistance adding 97,300 positions, leisure and hospitality boosting numbers by 40,000, construction up by 22,000 jobs, and 16,000 additional general manufacturing jobs.</p>
<p>But there was also enough in the <a href="https://www.bls.gov/news.release/empsit.nr0.htm">data released by Bureau of Labor Statistics</a> on Sept. 1 to give comfort – of sorts – to the “<a href="https://www.merriam-webster.com/dictionary/Jeremiah#:%7E:text=%3A%20person%20who%20is%20pessimistic%20about%20the%20present%20and%20foresees%20a%20calamitous%20future">Jeremiahs</a>” among us economists. I’ll explain.</p>
<p>While jobs were up, so too was the unemployment rate, which ticked up a modest 0.3% from July to 3.8%. And average hourly earnings <a href="https://fred.stlouisfed.org/series/CES0500000003">increased by just 0.2% in the month to US$33.82</a> – working out to a rather paltry 8 cent increase.</p>
<p>To me, rather than indicating that the job market is <a href="https://www.npr.org/2023/09/01/1197022768/jobs-labor-day-economy-inflation#:%7E:text=The%20jobs%20market%20is%20holding,that%20added%20the%20most%20jobs.">moving along at a healthy clip</a>, as some suggest, it shows signs of something else: a continuing slowdown.</p>
<h2>Look at the long-term trend</h2>
<p>The fact that, overall, jobs expanded a bit faster than expected doesn’t suggest that the economy is ramping up and inflation is going to spike again soon. Rather, it mostly speaks to the difficulty in predicting month-to-month movements. There’s good reason, perhaps, that economics is sometimes <a href="https://www.investopedia.com/terms/d/dismalscience.asp">called “the dismal science</a>” – we aren’t always that good at saying with certainty what will happen over the short term.</p>
<p>Monthly data has its place in making assessments and guiding policy, for sure. But focusing on just one month can be misleading as the data can be quite volatile. </p>
<p>The underlying trends are what matter more. And that is where I see signs of a slowdown.</p>
<p>In 2022, labor demand – as measured by job openings plus nonfarm employment – exceeded labor supply, as measured by the labor force. In other words, there were <a href="https://www.stlouisfed.org/publications/regional-economist/2023/apr/state-level-us-labor-market-supply-demand">more job openings than people willing to fill</a> the positions.</p>
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<p>As a result, we saw labor earnings increase by 5.1% relative to 2021. Great news for employees, but less so for the Federal Reserve: Higher wages combined with supply chain disruptions and the effect of war in Ukraine meant that the inflation rate, as measured by consumer price index growth, rose 7.7% in 2022.</p>
<p>To tame inflation, the Fed embarked on a program of aggressive interest-rate hikes. This resulted in a general economic slowdown by the beginning of 2023. The housing market cooled. Construction and related markets slowed.</p>
<p>But now labor supply is outpacing labor demand – there are more people looking for jobs than there are openings.</p>
<p>Based on the first seven months of data in 2023, <a href="https://www.bls.gov/news.release/pdf/realer.pdf">wage growth</a> has slowed to 3.4% compared to 2022, as has general inflation, slowing to 3.5%.</p>
<p>So where is the economy heading? The preponderance of the data <a href="https://www.reuters.com/markets/us/us-leading-indicators-point-recession-starting-soon-2023-07-20">is pointing to a general economic slowdown</a>. As a result, some suggest the U.S. economy may be <a href="https://abcnews.go.com/Business/soft-landing-means-chances-happen/story?id=94086706#:%7E:text=But%20the%20central%20bank%20hopes%20it%20can%20cool,landing%20at%20an%20event%20at%20the%20Brookings%20Institution">heading for a “soft landing</a>,” where inflation rates reach 2% to 2.5% as the U.S. avoids recession.</p>
<p>But when it comes to the chances of recession, the economy is not quite out of the woods yet. True, inflation is trending down. But earnings have generally grown slower than inflation, resulting in a <a href="https://www.nytimes.com/2023/08/25/business/consumer-retail-shopping.html">loss of purchasing power</a> for consumers.</p>
<p>Less cash to spend on goods doesn’t appear to have hit the economy yet. <a href="https://www.bea.gov/data/consumer-spending/main">Consumer spending</a> in the first seven months of 2023 was up 1.9% on the previous year, by my calculations. However, there is evidence that a lot of this was due to consumers purchasing on credit. Credit card debt reached <a href="https://theweek.com/economy/1026198/american-consumers-credit-crisis">a staggering $1.3 trillion</a> in the second quarter of 2023.</p>
<p>This is not sustainable. At some point soon, consumer spending will have to slow.
And given that consumer spending represents <a href="https://www.mprnews.org/story/2008/10/30/consumer-spending-accounts-for-two-thirds-of-us-economy">about two-thirds of total GDP</a>, a recession could still occur. </p>
<p>My best guess at the moment is that a recession is most likely to occur in early 2024, after the usual spending spree that is the holidays. But fortunately, thanks to the Fed’s recent efforts to decelerate the economy gradually, a major contraction is unlikely.</p><img src="https://counter.theconversation.com/content/212678/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Christopher Decker does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The latest labor figures are less encouraging than they might seem.Christopher Decker, Professor of Economics, University of Nebraska OmahaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2125512023-08-30T15:13:33Z2023-08-30T15:13:33ZCentral banks say interest rates will stay high but it’s unclear if this will be enough to curb inflation<figure><img src="https://images.theconversation.com/files/545512/original/file-20230830-21-i0qm7l.jpg?ixlib=rb-1.1.0&rect=0%2C223%2C4019%2C2414&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Central bankers, policymakers and academics meet annually at Jackson Hole, Wyoming to discuss the economy.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/jackson-hole-wyoming-landscape-photos-2276541363">Sarah Hollemans/Shutterstock</a></span></figcaption></figure><p>The US central bank, the Federal Reserve, has recently signalled that it will keep interest rates high for as long as it takes to bring inflation down to its 2% target. </p>
<p>Other major central banks, such as the UK’s Bank of England and the European Central Bank (ECB), are likely to follow suit. But rate-setters face some dilemmas when it comes to balancing the use of interest rates to slow the economy versus the risk of a recession.</p>
<p>In an August 25 speech during <a href="https://www.federalreserve.gov/newsevents/speech/powell20220826a.htm">the annual Jackson Hole Symposium</a>, an <a href="https://www.nytimes.com/2023/08/24/business/economy/jackson-hole-economic-conference.html#:%7E:text=High%20on%20its%20list%20of,Fed%20event%20of%20the%20year.">influential summer gathering</a> of central bankers, policymakers and academics, chairman Jerome Powell indicated that the Fed is not yet convinced it has won the battle against inflation. This is despite the <a href="https://www.usinflationcalculator.com/inflation/current-inflation-rates/">US headline rate of inflation</a> falling from 8.5% in March 2022 (when the Fed started raising rates) to 3.2% in July.</p>
<p>Powell did suggest the central bank might start to slow the pace of rate rises after <a href="https://www.reuters.com/markets/rates-bonds/fed-poised-hike-rates-markets-anticipate-inflation-endgame-2023-07-26/#:%7E:text=The%20hike%2C%20the%20Fed's%2011th,exceeded%20for%20about%2022%20years.">11 consecutive rises</a> in interest rates to 5.5% in little more than a year. As in other regions, such as the UK and EU, recent rapid increases have reversed around <a href="https://www.macrotrends.net/2015/fed-funds-rate-historical-chart">a decade of ultra-low rates</a>. </p>
<p>This leads to even higher interest rates being charged by financial institutions, and so is designed to slow the economy. But if taken too far, it could also trigger a recession.</p>
<p>The Jackson Hole meeting is closely watched by financial markets, governments and the media for indications of the long-term direction of monetary policy, and for deeper insights into the challenges facing the world’s central banks. And so the speech was <a href="https://edition.cnn.com/business/live-news/markets-jackson-hole-fed-meeting/index.html#:%7E:text=Stocks%20fall%20as%20traders%20digest,and%20the%20Nasdaq%20dropped%200.3%25.">a disappointment to financial markets</a>, which have been rocked by recent sharp interest rates hikes. </p>
<p>For more than a decade, stock markets boomed on the back of near-zero interest rates, with the US Dow Jones Industrial Average (DJIA) <a href="https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart">quadrupling</a>. But as the Fed started raising rates, the DJIA plummeted by 20%, with a short-lived recovery that soon fizzled out. And so, market hopes for a rate cut this year have been dashed – although Powell did suggest that how far and how fast rates would rise remains up for debate. </p>
<p>Indeed, Powell warned of the potential for more pain to come for households and businesses either way. Reducing inflation inevitably leads to below-trend economic growth, which causes companies to reduce pay and hiring activity. Outlining central banks’ current balancing act, <a href="https://www.federalreserve.gov/newsevents/speech/powell20220826a.htm">he said</a>: “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”</p>
<p>Similar sentiments were <a href="https://www.ecb.europa.eu/press/key/date/2023/html/ecb.sp230825%7E77711105fe.en.html">echoed by ECB president Christine Lagarde</a> at Jackson Hole. The Eurozone is also in the middle of sharply raising interest rates, despite slumping economic growth. While Largarde emphasised that the ECB must aim to keep inflation at 2% in the medium term, she also said: “There is no pre-existing playbook for the situation we are facing today – and so our task is to draw up a new one.”</p>
<p>Indeed, it remains to be seen if the world economy is entering a new phase of high inflation and weak growth, or whether the conditions that have led to the recent inflationary surge are temporary.</p>
<h2>Are we in a new economic era of high inflation?</h2>
<p>At Jackson Hole, Powell highlighted the need to ensure that public expectations of continued rapid inflation do not become entrenched. This could trigger a wage-price spiral that could get out of control. He warned that the cost of inaction would, therefore, be even higher.</p>
<p>Indeed, all of the major central banks, including the Fed, dramatically underestimated the effect of the pandemic on inflation. They have been <a href="https://www.reuters.com/world/uk/ex-officials-say-bank-england-was-too-slow-heed-inflation-warnings-2023-07-05/">criticised for not acting in time</a> and are now scrambling to rapidly increase interest rates. But why didn’t the central banks’ economic forecasting models predict rising inflation?</p>
<p>Gita Gopinath, the IMF deputy director, <a href="https://www.kansascityfed.org/Jackson%20Hole/documents/9090/Remarks_by_Gopinath.pdf">argued at Jackson Hole</a> that central bank models are outdated because they underestimated the long-term effects of supply-side disruptions. She suggested that recent failures to stop inflation rises fast enough have seriously damaged central banks’ credibility. As a result, they can no longer hope to ignore short bursts of inflation without serious consequences. She also raised the possibility that, in the long term, weaker economic growth might indeed be the price of curbing inflation.</p>
<p>Several policymakers, including Barack Obama’s former economic adviser Jason Furman, <a href="https://www.kansascityfed.org/Jackson%20Hole/documents/9674/JH2022_Furman.pdf">also in attendance at Jackson Hole</a>, have even suggested that revising central banks’ target rate of inflation to 3% from 2% would be no bad thing. This is still heresy for most central bankers, who believe making such a significant change to their remit would damage their credibility even more.</p>
<h2>Dilemmas facing central banks</h2>
<p>The Jackson Hole meeting highlighted three key dilemmas for central banks.</p>
<p>First, is the medicine (rate rises) working? While inflation has fallen, core rates in the UK, EU and US are still well above the 2% target. It’s unclear whether slowing demand in the economy is the right approach when inflation has been caused by “supply-side disruption” (pandemic-era supply shortages and the commodity-related effects of Russia’s invasion of Ukraine left too much money chasing too few goods). </p>
<p>And since higher interest rates <a href="https://www.bankofengland.co.uk/-/media/boe/files/speech/2023/february/expectations-lags-and-the-transmission-of-monetary-policy-speech-by-catherine-l-mann.pdf">can take up to 18 months to work</a>, it is hard to judge yet whether economic growth has slowed enough due to higher rates.</p>
<p>Second, it’s unclear how much more economic pain it will take to contain inflation. This question is particularly acute for the ECB and the Bank of England – economic growth in the EU and UK has been much more anaemic and inflation higher than in the US.</p>
<p>Finally, central banks face real challenges in trying to restore their credibility. Given major uncertainty about the future of the world economy, they face the unenviable task of either taking a wait-and-see approach until trends are clearer, or taking pre-emptive action to re-assert their credibility and prevent the worst if inflation remains persistent. </p>
<p>As the global economy cools, particularly driven by recent <a href="https://www.vox.com/world-politics/2023/8/29/23845841/chinas-economy-xi-expert">weak economic growth in China</a>, these trade-offs will only become harder to make.</p><img src="https://counter.theconversation.com/content/212551/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steve Schifferes does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The world’s central banks face a range of dilemmas, not least whether high inflation – and therefore high interest rates – will become permanent.Steve Schifferes, Honorary Research Fellow, City Political Economy Research Centre, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2098772023-07-18T05:56:35Z2023-07-18T05:56:35ZAustralia is on the brink of ending interest rate hikes and an economic first – beating inflation without a recession<figure><img src="https://images.theconversation.com/files/537989/original/file-20230718-19-fmur8p.png?ixlib=rb-1.1.0&rect=597%2C474%2C1304%2C776&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>What if Reserve Bank Governor Philip Lowe and his successor Michele Bullock were able to achieve something truly remarkable – a steady decline in inflation without further interest rate increases, and without bringing on a recession.</p>
<p>It’s suddenly looking possible. Inflation is now coming down so quickly worldwide there’s probably no need to push it down further.</p>
<p>We couldn’t have said that a week ago. Then, the US inflation rate was <a href="https://tradingeconomics.com/united-states/inflation-cpi">4%</a>, well down on the peak of 9.1% a year earlier, but high enough for eminent economists such as former US Treasury Secretary Larry Summers to say the US would need a mountain of unemployment to bring it down further.</p>
<p>Specifically, Summers said that to <a href="https://slate.com/business/2022/07/larry-summers-massive-unemployment-fed-inflation.html">control inflation</a> the US would need </p>
<blockquote>
<p>five years of unemployment above 5% to contain inflation – in other words, we need two years of 7.5% unemployment, or five years of 6% unemployment, or one year of 10% unemployment</p>
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<p>That was in late June, when US inflation had slipped from 5% to 4.9% to 4% over three months. Then, it was at least arguable that it wouldn’t fall much further without another push.</p>
<p>No longer. Last week, we learned that US inflation plunged yet again to <a href="https://edition.cnn.com/2023/07/12/economy/cpi-inflation-june/index.html">3%</a> in June. Although our result for June isn’t out yet (it’s next week) it is now no longer easy to argue that progress isn’t real and continuing.</p>
<p>This graph of the latest monthly readings of annual inflation rates shows inflation peaked in the US, the UK, Canada and Australia late last year, and has been coming down fairly steadily since. </p>
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<p>Summers and others in the US used to deride those who said ultra-high inflation would go away as “<a href="https://www.washingtonpost.com/opinions/2021/11/15/inflation-its-past-time-team-transitory-stand-down/">team transitory</a>”. But it is now looking as if that high inflation was indeed transitory, even if the transition took longer than expected.</p>
<p>Driving down inflation has been one of the key forces that drove it up: energy and transport prices, which surged in the wake of Russia’s February 2022 invasion of Ukraine. </p>
<p>US energy prices have fallen 16.7% over the past year, led down by a <a href="https://www.bls.gov/news.release/cpi.nr0.htm">26.5%</a> slide in the price of what Australians call petrol. That’s a saving that will push down Australia’s inflation rate and inflation rates worldwide.</p>
<p>Non-energy and non-food inflation fell as well, suggesting that there isn’t (yet) a psychology of expectations holding US inflation up.</p>
<h2>Falling inflation expectations</h2>
<p>Here, Australians expect falling inflation, if their answers to the Melbourne Insitute’s monthly <a href="https://melbourneinstitute.unimelb.edu.au/publications/macroeconomic-reports/latest-news/survey-of-consumer-inflationary-and-wage-expectations">expectations survey</a> are to be believed. In June, those surveyed expected inflation of 5.2% in the year ahead, down from 6.3% a year earlier.</p>
<p>This makes Australians less likely than they were to bake high inflation into wage negotiations and other decisions, making it less likely inflation will remain high.</p>
<p>And it ought to be noted that the inflation Australians say they expect has traditionally been <a href="https://tradingeconomics.com/australia/inflation-expectations">much more than what’s been delivered</a>. That’s presumably because most of us notice the prices that are going up more than those that aren’t.</p>
<h2>A soft landing, without a recession</h2>
<p>The much <a href="https://www.forbes.com/advisor/investing/inflation-outlook-2023/">quicker than expected</a> collapse in US inflation has dramatically raised the likelihood of what’s called a “<a href="https://www.nytimes.com/2023/07/13/opinion/paul-krugman-soft-landing-inflation.html">soft landing</a>” in the US. Here in Australia, it’s what our current Reserve Bank Governor has called staying on the “<a href="https://www.rba.gov.au/speeches/2023/sp-gov-2023-06-07.html">narrow path</a>” of returning inflation to target in a reasonable timeframe, without a recession.</p>
<p>If that happens, finance journalist <a href="https://thenewdaily.com.au/opinion/2023/07/17/rba-michele-bullock-good-omens/">Alan Kohler</a> says Lowe and his successor Michele Bullock (who takes over in September) will be the first team at the top of the bank to get inflation down from above 7% without delivering a recession.</p>
<p>There was a recession when the bank tried to get inflation down below 7% in the mid-1970s, in the early 1980s, and in the early 1990s.</p>
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<p>That we might be able to pull off yet another first ought no longer to surprise us, after all of the firsts during COVID. Enduring Australia’s (brief) 2020 recession without unemployment climbing above 7% was also a first.</p>
<p>The minutes of the Reserve Bank’s June board meeting released on Tuesday show it is prepared to <a href="https://www.rba.gov.au/monetary-policy/rba-board-minutes/2023/2023-07-04.html">countenance</a> such a first. </p>
<p>The bank’s board members acknowledged that inflation was “now declining, albeit from a high level”, while falling commodity and shipping prices were cutting cost pressures. All this before the <a href="https://theconversation.com/the-rba-has-kept-interest-rates-on-hold-heres-why-itll-be-cautious-from-here-on-208917">full effect</a> of the bank’s 12 rate rises to date has been felt.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/meet-michele-bullock-the-rba-insider-tasked-with-making-the-reserve-bank-more-outward-looking-as-its-next-governor-209379">Meet Michele Bullock, the RBA insider tasked with making the Reserve Bank more outward-looking as its next governor</a>
</strong>
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<p>Remember, these are minutes of a meeting that took place <em>before</em> last week’s extraordinarily good news from the US. Those board members’ comments hold open the possibility of Australia keeping the bulk of its gains in employment, while getting inflation back down to controllable levels. </p>
<p>The fact that it has never happened before hasn’t stopped the economics team at the ANZ Bank from <a href="https://cdn.theconversation.com/static_files/files/2748/Change_in_RBA_call_an_extended_pause_at_4_1.pdf">predicting</a> it – no further rate rises from here on, a continuing slide in inflation, and only a modest uptrend in unemployment.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/new-findings-show-a-direct-causal-relationship-between-unemployment-and-suicide-209486">New findings show a direct causal relationship between unemployment and suicide</a>
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<h2>A ‘Goldilocks’ economy is in sight</h2>
<p>The “<a href="https://www.investopedia.com/terms/g/goldilockseconomy.asp">Goldilocks</a>” outcome – not too hot or too cold, but just right – would be keeping in work most of the Australians who got into work when unemployment fell <em>and</em> getting on top of inflation. If we can manage that, we will have done future Australians an enormous service.</p>
<p>Things get easier when unemployment is low. We get more likely to become more productive, because we’re less resistant to change when unemployment is less of a threat. We get in a better position to help the budget, by taking less in benefits and paying more in tax. And we become more like each other – lessening inequality.</p>
<p>It is looking as if the Reserve Bank has the opportunity to cement low unemployment <em>while</em> controlling inflation. Holding off (and perhaps abandoning) future rate raises will keep it in reach.</p>
<p>Our next official inflation update, due out next Wednesday, will matter a lot.</p><img src="https://counter.theconversation.com/content/209877/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Even a week ago we couldn’t have predicted this. But after good news from the US, our Reserve Bank now has a chance to cement low unemployment while controlling inflation – without more rate rises.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2084772023-07-02T03:10:15Z2023-07-02T03:10:15ZTwo more RBA rate hikes, tumbling inflation, and a high chance of recession: how our forecasting panel sees 2023-24<figure><img src="https://images.theconversation.com/files/534767/original/file-20230629-21-vu0a05.png?ixlib=rb-1.1.0&rect=299%2C305%2C3914%2C1678&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">DALL·E/Shutterstock</span></span></figcaption></figure><p>Of the 27 leading economists assembled by The Conversation to forecast the financial year that’s just begun, every one expects inflation to continue to fall.</p>
<p>The official quarterly measure of inflation peaked at 7.8% in the year to December and is now <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">7%</a>, and the newer monthly measure peaked at 8.4% and is now <a href="https://www.abs.gov.au/media-centre/media-releases/monthly-cpi-indicator-annual-rise-56-may-2023">5.6%</a>.</p>
<p>What’s at issue is how quickly inflation will continue to fall, how many more times the Reserve Bank will push up interest rates to make sure it falls as quickly as it wants, and the damage those rate hikes will do to an already very weak economy.</p>
<p>Twelve of the 27 think a recession is either more likely than not, or an even chance. And almost all expect a “per-capita recession”, in which economic growth fails to keep pace with population growth, sending living standards backwards.</p>
<p>Now in its <a href="https://theconversation.com/au/topics/conversation-economic-survey-81354">fifth</a> year, The Conversation survey draws on the expertise of leading forecasters in 25 Australian universities, think tanks and financial institutions – among them economic modellers, former Treasury, International Monetary Fund and Reserve Bank officials, and a former member of the Reserve Bank board.</p>
<h2>Two more interest rate hikes this year</h2>
<p>After 12 interest rate hikes that lifted the Reserve Bank’s cash rate from 0.1% to 4.1% in a little over a year, the panel expects two more.</p>
<p>The panel predicts a cash rate of <a href="https://cdn.theconversation.com/static_files/files/2736/2023-24_CONVERSATION_AU_FORECASTING_SURVEY.pdf">4.5%</a> by the end of this year, followed by a decline to 4.3% by the middle of next year, and to 3.9% by the end of 2024.</p>
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<p>Asked to specify the month in which the cash rate will peak, and how high it will go, the panel settled on a peak of 4.7% in November. </p>
<p>A cash rate of 4.7% would lift the typical rate on a new mortgage from 5.4% to 6%, adding a further $200 per month to the cost of servicing a $600,000 loan. </p>
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<p>But the extra pain would be short-lived. Asked how long the cash rate would stay at its peak before being cut, the panel’s average guess was <a href="https://cdn.theconversation.com/static_files/files/2736/2023-24_CONVERSATION_AU_FORECASTING_SURVEY.pdf">six months</a>, meaning rates would begin to fall in June next year.</p>
<p>Several of those surveyed warned against expecting rates ever to fall back to anything like the emergency lows of 2020 and 2021. Others noted that the one thing that could force the Reserve Bank to cut rates faster than expected was a recession.</p>
<h2>Plummeting inflation, an uptick in real wages</h2>
<p>The panel expects inflation to slide from 7% to 5.2% by the end of the year, then to 3.9% by mid-2024, and to 2.9% a year later – putting it back within the Reserve Bank’s 2-3% target band.</p>
<p>Although steep, the fall in inflation isn’t as fast as predicted by the bank <a href="https://www.rba.gov.au/publications/smp/2023/may/forecasts.html">itself</a> (3.6% by mid-2024) or the <a href="https://images.theconversation.com/files/534717/original/file-20230629-27-c3e0pf.PNG">Treasury</a> (3.25% by mid-2024).</p>
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<p>Barrenjoey Chief Economist Jo Masters said while price pressure from imported goods and fuel was easing, inflation was increasingly being driven by the prices of services such as rents that tended to be persistent.</p>
<p>Margaret McKenzie of Federation University identified the reopening of borders as a source of downward pressure on prices, saying it would ease labour shortages. </p>
<p>Moody’s Analytics’ Harry Murphy Cruise said although weaker spending was putting downward pressure on inflation, the Reserve Bank seemed unwilling to let that take its course and wanted to slow inflation more quickly, risking “knocking the wind out” of an already fragile economy.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/going-down-the-6-graphs-that-show-economic-growth-shrinking-206068">Going down: the 6 graphs that show economic growth shrinking</a>
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<p>A welcome upside of much lower inflation forecasts is a forecast of the first increase in real wages in three years, albeit a small one.</p>
<p>The panel expects wages growth of 4% in the financial year ahead, just beating price growth of 3.9%. The resulting 0.1% increase in the so-called real wage would be followed by a more substantial increase of 0.7% in 2024-25 as wages growth of 3.6% topped price growth of 2.9%.</p>
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<h2>A per-capita (if not an actual) recession</h2>
<p><a href="https://www.abc.net.au/news/2023-06-16/nz-enters-a-recession-as-economy-shrinks-again/102477992">New Zealand</a> is already in a recession, and the panel assigns probabilities of 59% and 42% to the prospect of recessions in the United Kingdom and United States respectively, with the most likely start for both being the final three months of this year.</p>
<p>Throughout 2023, the panel expects economic growth of just 1.2% in the US and historically weak growth of 4.9% in China, suggesting Australia’s biggest customer for minerals will be unable to provide much help as Australia’s own economic growth dwindles.</p>
<p>The panel is forecasting Australian economic growth of just 1.2% in 2023 – the lowest rate outside a recession in more than 30 years, climbing to just 1.5% in the year to June 2024 and 2.3% in the year to June 2025. </p>
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<p>AMP Chief Economist Shane Oliver said if the low growth rate turns into what is usually called a recession (two consecutive quarters of shrinking gross domestic product) it will be because the Reserve Bank pushes up interest rates too far for highly indebted Australians to withstand.</p>
<p>He said consumer spending is almost certain to shrink as debt servicing costs hit a record high and, on the Bank’s <a href="https://www.rba.gov.au/publications/fsr/2022/oct/box-b-the-impact-of-rising-interest-rates-and-inflation-on-indebted-households-cash-flows.html">own analysis</a>, 15% of households with a variable-rate mortgage – roughly a million people – experience negative cash flow.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/why-rba-governor-philip-lowe-wants-to-damage-the-economy-further-207022">Why RBA Governor Philip Lowe wants to damage the economy further</a>
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<p>Asked to estimate the chance of the Australian economy going into recession in the next two years, the panel’s average answer was <a href="https://cdn.theconversation.com/static_files/files/2736/2023-24_CONVERSATION_AU_FORECASTING_SURVEY.pdf">38%</a>, well up from the <a href="https://theconversation.com/higher-interest-rates-falling-home-prices-and-real-wages-but-no-recession-top-economists-forecasts-for-2023-198975">26%</a> the panel assigned to a recession in February’s survey.</p>
<p>KPMG Chief Economist Brendan Rynne assigned a 100% probability to what he called a “shallow, extended recession”, in which growth is first weighed down by a downturn in housing investment, followed by a slowdown in business investment.</p>
<p>The average forecast start date of a recession, should there be one, is the final three months of this year.</p>
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<p>The panel’s economic growth forecast of 1.5% for 2023-24 is well below the Treasury’s forecast of population growth of 2%, suggesting output per person will shrink in what is called a <a href="https://www.amp.com.au/content/dam/amp-au/documents/insights/recession-risk-oi-16-2023v2.pdf">per-capita recession</a>.</p>
<h2>Unemployment climbing, albeit slowly</h2>
<p>The panel expects a gradual increase in the unemployment rate from its present near-50-year low of 3.6% to 4.3% by mid-next year, followed by an increase to 4.6% by mid-2025.</p>
<p>The forecasts are in line with those of the Treasury and Reserve Bank, and suggest Australia is unlikely to surrender the big gains in employment made in the aftermath of the COVID lockdowns and return to the pre-COVID unemployment rate of 5%.</p>
<p>University of Tasmania economist Mala Raghavan said while job markets would become less tight as the economy weakened and as foreign students and migrants returned, the impact would be felt first in the underemployment rate, which reflects the extent to which workers are working fewer hours than they want.</p>
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<h2>Less household buying, higher house prices</h2>
<p>The panel expects growth in real household spending of just 1.5% in 2023-24, meaning the amount bought per household is likely to shrink.</p>
<p>Yet at the same time, it is forecasting continued modest growth in home prices, which climbed for the <a href="https://www.corelogic.com.au/news-research/news/2023/home-value-index-shows-housing-values-increase-in-june,-but-the-pace-of-growth-has-slowed">fourth month in a row</a> in June after falling since mid-2022.</p>
<p>Most of the panel expects further growth in Sydney and Melbourne home prices in the 12 months ahead, with only four panel members predicting declines. The average forecast is for both Sydney and Melbourne prices to climb a further 2%.</p>
<p>Former Productivity Commission economist Jenny Gordon identified renewed migration as a driver of demand, offset by declining real wages and the risk of a recession.</p>
<p>Jo Masters said sellers appeared to be withdrawing supply, with total listings a third lower than normal, while the buyers appeared to have higher incomes than before and lower debt-to-income ratios, meaning they were less troubled by high interest rates.</p>
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<h2>Tiny share market growth, tiny budget deficit</h2>
<p>The panel expects the budget surplus for the financial year <a href="https://www.finance.gov.au/publications/commonwealth-monthly-financial-statements/2023/mfs-may">just ended</a> to be followed by only a <a href="https://cdn.theconversation.com/static_files/files/2736/2023-24_CONVERSATION_AU_FORECASTING_SURVEY.pdf">tiny</a> budget deficit of A$9.4 billion in 2023-24, which would be less than 0.4% of GDP.</p>
<p>Two panellists, Mariano Kulish and Stephen Anthony, expect this year’s surplus to be followed by another one of $18 billion to 20 billion. Anther, Jenny Gordon, expects this year’s surplus to be followed by a budget in balance. </p>
<p>The forecasts reflect an iron ore price expected to stay near US$104 per tonne at the end of the year, instead of falling towards US$60 as forecast in the budget.</p>
<p>The panel expects modest share market growth of 3% in the year to June 2024, with the results sensitive to home prices (through the profits of financial corporations) and minerals prices (through the profits of mining companies).</p>
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<h2>The Conversation’s Economic Panel</h2>
<p><em>Click on economist to see full profile.</em></p>
<p><iframe id="tc-infographic-882" class="tc-infographic" height="400px" src="https://cdn.theconversation.com/infographics/882/0a0836b37189a0c0b4ab743abff911624a51c29e/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p>
<p><strong><a href="https://cdn.theconversation.com/static_files/files/2736/2023-24_CONVERSATION_AU_FORECASTING_SURVEY.pdf">Download the results on one page</a></strong></p><img src="https://counter.theconversation.com/content/208477/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The good news includes a return to real wage growth and a restrained increase in unemployment. The bad news includes even higher home prices and a per-capita recession.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2024692023-05-23T11:14:49Z2023-05-23T11:14:49ZDegrowth isn’t the same as a recession – it’s an alternative to growing the economy forever<figure><img src="https://images.theconversation.com/files/527242/original/file-20230519-17-a09kjs.jpg?ixlib=rb-1.1.0&rect=22%2C22%2C4898%2C3223&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">lovelyday12/shutterstock</span></span></figcaption></figure><p>The UK economy unexpectedly shrank by 0.3% in March, according to the <a href="https://news.sky.com/story/uk-economy-shrank-0-3-in-march-ons-figures-show-12878316">Office of National Statistics</a>. And though the country is likely to narrowly avoid an official recession in 2023, just as it did the previous year, the economy is projected to hit the worst growth rates since the <a href="https://www.bloomberg.com/news/articles/2023-02-04/boe-signals-worst-years-for-uk-growth-since-great-depression?leadSource=uverify%2520wall">Great Depression</a>, and the worst in the <a href="https://commonslibrary.parliament.uk/research-briefings/sn02784/">G7</a>. </p>
<p>For many people, this certainly feels like a recession, with <a href="https://www.independent.co.uk/news/uk/home-news/food-inflation-products-worst-hit-b2263780.html">food prices</a> soaring and <a href="https://www.tuc.org.uk/news/2022-worst-year-real-wage-growth-nearly-half-century">pay falling dramatically</a> below inflation meaning many people are having to reduce their standard of living. </p>
<p>Against this backdrop, the main political parties are focused on delivering economic growth for a better future. One of Prime Minister Rishi Sunak’s five <a href="https://www.gov.uk/government/news/prime-minister-outlines-his-five-key-priorities-for-2023">priorities</a> for 2023 is simply “growing the economy”, while opposition leader Keir Starmer has <a href="https://www.itv.com/news/2023-02-23/keir-starmer-to-launch-labours-five-national-missions">pledged</a> to turn the UK into the fastest growing G7 economy. </p>
<p>Sunak and Starmer’s priorities reflect conventional economic <a href="https://www.youtube.com/watch?v=sWznhE2jEUA">wisdom</a> that “growth, growth, growth” increases incomes and standards of living, employment and business investment. When the economy doesn’t grow, we see unemployment, hardship and inequality. </p>
<h2>Growth cannot solve everything</h2>
<p>However, economic growth on its own is not going to solve these multiple and intersecting crises, as it only counts the total value of goods and services produced without measuring qualitative change – whether this stuff makes you feel happy or secure. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/527253/original/file-20230519-19-vzb5dy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="TVs in a shop" src="https://images.theconversation.com/files/527253/original/file-20230519-19-vzb5dy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/527253/original/file-20230519-19-vzb5dy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=359&fit=crop&dpr=1 600w, https://images.theconversation.com/files/527253/original/file-20230519-19-vzb5dy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=359&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/527253/original/file-20230519-19-vzb5dy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=359&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/527253/original/file-20230519-19-vzb5dy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=451&fit=crop&dpr=1 754w, https://images.theconversation.com/files/527253/original/file-20230519-19-vzb5dy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=451&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/527253/original/file-20230519-19-vzb5dy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=451&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">GDP measures things not feelings.</span>
<span class="attribution"><span class="source">Luckies / shutterstock</span></span>
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</figure>
<p>In contrast, an increasing number of <a href="https://www.beyond-growth-2023.eu/">policymakers</a>, thinkers and activists argue for abandoning our obsession with growth at all costs. Instead of pursuing GDP growth, they suggest orienting the economy towards social equality and wellbeing, environmental sustainability and democratic decision making. The most far reaching of those proposals are made under the umbrella term of degrowth.</p>
<p>Degrowth is a set of ideas and a <a href="https://degrowth.info/library/degrowth-in-movements-exploring-pathways-for-transformation">social movement</a> that presents a comprehensive solution to these issues. The pandemic demonstrated that a new normal can be achieved at pace, as we saw sweeping changes to how many of us lived, worked, and travelled. </p>
<p>At the time, <a href="https://www.spectator.co.uk/article/the-coronavirus-crisis-reveals-the-misery-of-degrowth/">headlines</a> equated the pandemic-related GDP squeeze with the perceived “misery of degrowth”. With persistently high inflation rates and the cost of living still spiralling, these debates are going to resurface.</p>
<h2>Degrowth is not the same as shrinking GDP</h2>
<p>To begin with, degrowth is not the same as negative GDP growth. Instead, degrowth envisions a society in which wellbeing does not depend on economic growth and the <a href="https://ourworldindata.org/grapher/co2-emissions-vs-gdp">environmental</a> and <a href="https://panarchy.org/mill/stationary.1848.html">social</a> consequences of its pursuit. Degrowth proposes an equitable, voluntary reduction of overconsumption in affluent economies. </p>
<p>Equally important is to shift the economy away from the ecologically and socially harmful idea that producing more stuff is always good. Instead, economic activity could focus on promoting care, cooperation and autonomy, which would also increase wellbeing and give people a bigger say in how their lives are run.</p>
<p>Yet, for many people the word smacks of misery and the type of frugality they are trying to escape from during the cost of living crisis. </p>
<p>But degrowth, if successfully achieved, would arguably feel better than a recession or a cost-of-living crisis. Here are three reasons why:</p>
<p><strong>1. Degrowth is democratic</strong></p>
<p>The first is the undemocratic and unplanned nature of a recession or cost-of-living crisis. Most citizens would agree, for example, that they had little to no control over the deregulation of the finance industry, and subsequent boom in sub-prime mortgage lending and derivatives trading that caused the 2008/09 financial crash. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/527728/original/file-20230523-19-ygtyeh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Cranes in skyline" src="https://images.theconversation.com/files/527728/original/file-20230523-19-ygtyeh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/527728/original/file-20230523-19-ygtyeh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/527728/original/file-20230523-19-ygtyeh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/527728/original/file-20230523-19-ygtyeh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/527728/original/file-20230523-19-ygtyeh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/527728/original/file-20230523-19-ygtyeh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/527728/original/file-20230523-19-ygtyeh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Things would still be built – but not just to satisfy a need for growth.</span>
<span class="attribution"><span class="source">Oleg Totskyi / shutterstock</span></span>
</figcaption>
</figure>
<p>Degrowth, on the other hand, is a profoundly democratic project. It emphasises direct democracy and deliberation, which means citizens can shape which economic sectors are decreased and by how much, and which ones will grow and by how much. </p>
<p>One example of such a democratic endeavour is the <a href="https://www.climateassembly.uk/">Climate Assembly UK</a>, whose 108 members were selected through a civic lottery process and were broadly representative of the population. After listening to expert testimony, the assembly issued a number of <a href="https://www.climateassembly.uk/report/read/">recommendations</a> to support the UK’s net zero climate target. Over a third of all members prioritised support for sustainable growth. Economic growth itself was not among the top 25 priorities. </p>
<p><strong>2. Degrowth would be egalitarian</strong></p>
<p>Recessions, especially when coupled with fiscal austerity, tend to amplify existing inequalities by hitting the poorest members of society first, including <a href="https://www.economist.com/graphic-detail/2021/03/08/how-covid-19-triggered-americas-first-female-recession-in-50-years">women</a>, working-class communities and ethnic minorities.</p>
<p>Degrowth drastically differs from a recession because it is a redistributive project. For instance, a <a href="https://www.opendemocracy.net/en/beyond-trafficking-and-slavery/radical-combination-degrowth-and-basic-income/">universal basic income</a>), an unconditional monthly state payment to all citizens, is a popular policy with degrowthers. </p>
<p>The degrowth vision is that basic income should guarantee a dignified living standard, remunerate <a href="https://www.england.nhs.uk/commissioning/comm-carers/carer-facts/">unpaid care</a>, and provide access to healthcare, food and accommodation for those in need. It could be financed by “<a href="https://citizensclimatelobby.uk/climate-income/policy-makers/carbon-fee-dividend/">climate income</a>” schemes that tax carbon and return revenues to the public.</p>
<p><strong>3. Degrowth wouldn’t hinder climate action</strong></p>
<p>In an economy reliant on growth, a recession is generally bad news for the environment. </p>
<p>For instance, for the UK to hit its net zero <a href="https://www.theccc.org.uk/publication/sixth-carbon-budget/#downloads">targets</a>, it must make annual public investments of between £4 billion and £6 billion by 2030. A recession would threaten public spending as well as the confidence investors have in low carbon developments in transport, housing or energy. </p>
<p>But such investments do not have to depend on growth but could instead be made through collective and democratic decisions to make climate action a priority. Carbon taxes will play a large part in this, as will stopping fossil fuel subsidies like the <a href="https://www.independent.co.uk/business/equinor-offices-targeted-by-climate-protesters-over-rosebank-oil-field-b2336220.html">£3.75 billion tax break</a> granted to develop the Rosebank oil and gas field in the sea north of Scotland.</p>
<p>To make sure we stay within the environmental limits within which we can safely operate, sometimes known as our <a href="https://www.stockholmresilience.org/research/planetary-boundaries/the-nine-planetary-boundaries.html">planetary boundaries</a>, degrowth suggests democratically establishing limits on resource use. For example, global greenhouse gas emissions or non-renewable energy use could be <a href="https://www.feasta.org/2008/05/29/cap-and-share-a-fair-way-to-cut-greenhouse-emissions/">capped</a> at a given level, and decline annually.</p>
<p>Sharing these resource “caps” among the population would ensure that while we stay within these safe environmental spaces, everyone has equitable access to the resources required to lead a fulfilling life. In contrast to the pursuit of endless growth, degrowth puts both climate action and human <a href="https://rosalux.nyc/demystifying-degrowth/">wellbeing</a> at its heart.</p><img src="https://counter.theconversation.com/content/202469/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Katharina Richter does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Not only is degrowth is not the same as negative GDP growth, it is actually better for the planet.Katharina Richter, Lecturer in Climate, Politics and Society, University of BristolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2036392023-05-03T18:30:37Z2023-05-03T18:30:37ZFed rate hikes, recession fears and political backlash leave ESG investors at a crossroads<figure><img src="https://images.theconversation.com/files/523943/original/file-20230502-26-p3xlrc.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C5464%2C3631&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">ESG investing looks for companies that do well on environmental, social and governance benchmarks. </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/directly-above-the-downtown-district-royalty-free-image/1328074262">Zhengshun Tang/Moment via Getty Images</a></span></figcaption></figure><p>The Federal Reserve <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20230503a.htm">raised interest rates</a> again on May 3, 2023, by a quarter point, making it the <a href="https://www.federalreserve.gov/monetarypolicy/openmarket.htm">Fed’s 10th rate hike</a> since March 2022 in an ongoing fight to tame inflation. These rate hikes have been reverberating through the economy, raising prospects of a recession amid heightened <a href="https://www.nber.org/papers/w31048">concerns about the fragile state of banks</a>. </p>
<p>The rate hikes are also rattling sustainability-focused investing, better known as ESG investing.</p>
<p>The trend toward ESG investing, which puts pressure on companies to meet environmental, social and governance benchmarks, has almost redefined asset management over the past decade. ESG funds today are a <a href="https://www.ussif.org//Files/Trends/2022/Overview%20infographic.pdf">multitrillion-dollar market</a>.</p>
<p>However, the high uncertainty around interest rates today, along with the prospects of a looming recession and a <a href="https://www.yahoo.com/now/larry-fink-face-esg-says-213102226.html">political backlash</a>, has put the future of ESG investors at a crossroads.</p>
<p>I <a href="https://warrington.ufl.edu/directory/person/7627/">specialize in sustainable finance</a>, and my recent work has documented the <a href="https://doi.org/10.1017/S0022109022001296">impact that tough economic times</a> can have on ESG investing demand. Investments into U.S. sustainable mutual funds have <a href="https://www.morningstar.com/articles/1133418/us-sustainable-funds-suffer-a-worse-quarter-than-conventional-peers">visibly slowed</a> since 2022, suffering their worst net flows in five years. Here are how three critical factors can affect investors’ zeal for socially conscious investing going forward.</p>
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<h2>Interest rate uncertainty</h2>
<p>One of the primary arguments that big institutional investors like BlackRock make for ESG investing is that it <a href="https://www.blackrock.com/ch/individual/en/themes/sustainable-investing">creates long-term value for shareholders</a>. Companies that pay careful attention to environmental, social and governance issues are believed to be better prepared for distant future risks, including regulatory risks and physical risks from climate change.</p>
<p>However, heightened uncertainty about interest rates poses a challenge today. That’s because higher rates can disproportionately affect the present value that investors assign to long-term investment outcomes. Let me explain.</p>
<p>Within the past year, the Federal Reserve has raised its benchmark lending rate from almost zero to a target <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20230503a.htm">range of 5% to 5.25%</a> to combat inflation. In financial markets, higher interest rates lead to higher discount rates. That means that future cash generated by long-term investments is considered to be worth considerably less at today’s higher interest rates.</p>
<p>The more distant an asset’s value lies in the future, the more heavily it will be discounted in value when rates are high. So, long-duration investments – like most ESG investments – are especially sensitive to changes in interest rates.</p>
<p>This economic mechanism was also part of the backdrop of the recent rout in tech stocks and the <a href="https://theconversation.com/why-svb-and-signature-bank-failed-so-fast-and-the-us-banking-crisis-isnt-over-yet-201737">series of bank failures</a> that started with the <a href="https://theconversation.com/silicon-valley-bank-how-interest-rates-helped-trigger-its-collapse-and-what-central-bankers-should-do-next-201697">collapse of Silicon Valley Bank</a>. </p>
<h2>Looming recession</h2>
<p>Another factor that could affect ESG investing is the potential for an economic downturn.</p>
<p>As <a href="https://doi.org/10.1111/jofi.12547">research shows</a>, investors do not necessarily make ESG investments for greater long-term returns, but often for altruistic reasons or due to personal preferences to hold greener assets. For these ESG investors, a looming recession could change their perspective on these “luxuries.”</p>
<p>In an early warning about this possibility, <a href="https://doi.org/10.1017/S0022109022001296">a recent study</a> I conducted with an economist at the Rotterdam School of Management found that retail investors showed signs of shying away from investing in sustainable mutual funds during the early months of the COVID-19 shock in 2020. This was a period when many households experienced layoffs and furloughs, which likely pushed them to set aside luxuries to prioritize protecting the values of their 401(k)s, IRAs and other investment portfolios.</p>
<p>In other words, investors may be all for ESG, <a href="https://www.wsj.com/articles/investors-are-all-for-esg-except-that-is-when-times-are-tough-11675527842">except when times are tough</a>.</p>
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<p>Prominent economists, such as former Treasury Secretary Larry Summers, have warned of a <a href="https://www.bloomberg.com/news/articles/2023-04-07/larry-summers-sees-higher-chance-of-recession-fed-nearing-the-end#xj4y7vzkg">likely recession</a> as inflation and the Fed’s battle against it persist. The International Monetary Fund also <a href="https://www.imf.org/en/Publications/WEO/Issues/2023/04/11/world-economic-outlook-april-2023">lowered its global economic growth outlook</a> from 3.4% in 2022 to 2.8% in 2023. </p>
<h2>Political backlash</h2>
<p>Finally, recent political friction and anti-ESG policies across states have started to create headwinds for pension funds and large institutions that serve them.</p>
<p>For example, <a href="https://www.reuters.com/business/sustainable-business/desantis-signs-sweeping-anti-esg-legislation-florida-2023-05-02/">Florida</a> and <a href="https://apnews.com/article/esg-woke-investing-kansas-culture-war-vetoes-20842bdda84432add49f267adb897df3">Kansas</a> passed laws in recent weeks and <a href="https://corpgov.law.harvard.edu/2023/03/11/esg-battlegrounds-how-the-states-are-shaping-the-regulatory-landscape-in-the-u-s/">several other states</a> including <a href="https://www.texastribune.org/2022/08/24/texas-boycott-companies-fossil-fuels/">Texas</a> and <a href="https://www.nytimes.com/2023/02/24/your-money/anti-esg-investing-kentucky.html">Kentucky</a> have taken actions to restrict the ability of state public pension funds to invest in companies based on their ESG performance, citing concerns about fraudulent greenwashing and potential fiduciary duty violations, referring to the obligation institutional investors have to seek the highest returns for the lowest risk possible.</p>
<p>These restrictions can severely limit the capacity for ESG investing by institutional investors, which have played a significant role in driving the growth of ESG investing.</p>
<figure class="align-center ">
<img alt="Lark Fink, in business attire and glasses, sits in a news studio being interviewed." src="https://images.theconversation.com/files/523942/original/file-20230502-321-8ju3yp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/523942/original/file-20230502-321-8ju3yp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/523942/original/file-20230502-321-8ju3yp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/523942/original/file-20230502-321-8ju3yp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/523942/original/file-20230502-321-8ju3yp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/523942/original/file-20230502-321-8ju3yp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/523942/original/file-20230502-321-8ju3yp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Blackrock CEO Larry Fink, shown during an earlier interview, told Bloomberg in 2023: ‘For the first time in my professional career, attacks are now personal. They’re trying to demonize the issues.’</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/blackrock-chairman-ceo-laurence-d-fink-appears-on-opening-news-photo/470074732">Taylor Hill/Getty Images</a></span>
</figcaption>
</figure>
<p>While <a href="https://dx.doi.org/10.2139/ssrn.3837706">concerns about greenwashing</a> and <a href="https://dx.doi.org/10.2139/ssrn.3887716">high fees</a> in ESG investing are not totally unwarranted, these political interventions can also have unintended consequences.</p>
<p>A <a href="https://dx.doi.org/10.2139/ssrn.4123366">recent study</a> from economists at Wharton and the Federal Reserve Bank of Chicago found that a Texas law enacted in 2021 prohibiting municipalities from contracting with banks with ESG policies had a distorting side effect on those municipalities’ borrowing costs. The policy ended up raising the cost of public finance, meaning the law ultimately cost taxpayers.</p>
<h2>Navigating the crossroads</h2>
<p>As companies hold their 2023 annual meetings, the discussions among corporate officials, investors and stakeholders will serve as an important barometer for the current state and future of ESG investing.</p>
<p>Due to high interest rate uncertainty, prospects of a recession and political upheaval, ESG is under pressure. Perceived in recent years as a paradigm shift in how market mechanisms can address harms to society, stakeholders are now <a href="https://www.eenews.net/articles/they-helped-create-esg-two-decades-later-some-see-a-mess/">scrutinizing ESG investing</a> with a critical lens regarding how strongly it can persist and how much impact it can have.</p>
<p>The next few years will be its most important stress test yet.</p><img src="https://counter.theconversation.com/content/203639/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sehoon Kim does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Three forces are pulling down ESG’s once-rapid rise in the investment world.Sehoon Kim, Assistant Professor of Finance, University of FloridaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2047072023-04-28T17:48:04Z2023-04-28T17:48:04ZThe Federal Reserve and the art of navigating a soft landing … when economic data sends mixed signals<figure><img src="https://images.theconversation.com/files/523457/original/file-20230428-16-6qiovj.jpg?ixlib=rb-1.1.0&rect=36%2C256%2C6062%2C3767&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">'Surely we can avoid an economic crash? We can, but don't call me Shirley!'</span> <span class="attribution"><a class="source" href="https://corporate.fathomevents.com/press/media/3893/airplane_still_ks_c-5344_ccde77f8e99d535abb14358ba6e9a325941369ac.jpg?anchor=center&mode=crop&rnd=132882314110000000">Paramount Pictures/Fathom Events</a></span></figcaption></figure><p>With inflation easing and the U.S. economy cooling, is the Federal Reserve done raising interest rates? After all, gently bringing down the trajectory of prices without crashing the economy was the central bank’s objective when it began jacking up rates over a year ago. </p>
<p>Gross domestic product, the broadest measure of an economy’s output, <a href="https://www.bea.gov/news/2023/gross-domestic-product-first-quarter-2023-advance-estimate">expanded at an annual pace</a> of a mere 1.1% in the first quarter, according to data released April 27, 2023 – down from 2.6% recorded in the final three months of 2022. And the latest consumer price data, from March, shows inflation slowing to 5% on an annualized basis, the <a href="https://fred.stlouisfed.org/series/CPIAUCSL#0">least in about a year</a>. </p>
<p>Unfortunately for consumers and businesses weary of soaring borrowing costs, the Fed’s not likely done hiking rates quite yet. <a href="https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html">Financial markets are predicting another quarter-point hike</a> when the Fed meets for a two-day meeting that ends May 3, 2023. And there could be several more increases to come.</p>
<p>But this does raise another important question: With all the recent, often conflicting, data and narratives regarding <a href="https://theconversation.com/jobs-report-hints-that-fed-policy-is-paying-off-and-that-a-growth-recession-awaits-203485">inflation</a>, <a href="https://theconversation.com/us/topics/2023-bank-crisis-135462">bank failures</a> and <a href="https://techcrunch.com/2023/04/27/tech-industry-layoffs/">layoffs in the tech sector</a>, is the Fed close to engineering the “soft landing” it’s been hoping for? </p>
<h2>The economy zigs then zags</h2>
<p>The GDP data is a mixed bag and provides some clues to the answer. </p>
<p>Overall, the recent GDP figures suggest a likely economic slowdown going forward, due largely to a drawdown in inventories – that is, rather than ordering new goods, companies are relying more on stuff currently in storage. Businesses seems more inclined to sell what is on hand rather than order up new products, likely in anticipation of a slowdown in consumption. And business investment declined 12.5% in the quarter. </p>
<p>At the same time, consumer spending, which represents about two-thirds of GDP, grew at a healthy 3.7% pace, and investment in equipment such as computers and robotics increased by 11.2% – though this category is quite volatile and could easily turn in subsequent quarters. </p>
<p>Other data also points to a slowdown, such as a <a href="https://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf">decline in new orders for manufactured goods</a>. This, combined with the drawdown in inventories in the GDP report, might suggest that businesses are anticipating a slowdown in demand for goods and services.</p>
<p>When we look at the labor market, while job <a href="https://www.bls.gov/news.release/empsit.nr0.htm">increases have been strong</a> – 334,000 over the past six months – job openings have been declining. After peaking at about 12 million in March 2022, openings dropped to <a href="https://www.bls.gov/jlt/">about 9.9 million</a> as of February, according to the Bureau of Labor Statistics.</p>
<h2>Inflation: Is it high or low?</h2>
<p>In terms of inflation, we can also see conflicting numbers.</p>
<p>The headline consumer price index <a href="https://www.bls.gov/news.release/cpi.nr0.htm">has indeed slowed steadily</a> since peaking in June 2022 at 9.1%. But the core preferred consumption index, the <a href="https://www.bloomberg.com/news/articles/2023-03-25/fed-s-preferred-inflation-gauge-seen-staying-elevated-eco-week?sref=Hjm5biAW">Fed’s favored measure of inflation</a>, <a href="https://fred.stlouisfed.org/series/PCEPILFE#0">has remained stubbornly elevated</a>. The latest data, released on April 28, 2023, showed the index, which excludes volatile food and energy prices, <a href="https://www.bea.gov/news/2023/personal-income-and-outlays-march-2023">was up 4.6% in March</a> from a year earlier and has barely budged in months.</p>
<p>Meanwhile, wages, which when rising can have a strong upward push on prices, <a href="https://www.nytimes.com/2023/04/28/business/wage-inflation-march.html">climbed at an annualized 5.1% in the first quarter</a>, also according to data released on April 28. That’s down from the peak of 5.7% in the second quarter of 2022 but is still about the fastest pace of wage gains in at least two decades. </p>
<h2>More hikes to come</h2>
<p>So what might all this suggest about Fed actions on interest rates?</p>
<p>The next meeting is scheduled to end on May 3, with the <a href="https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html">market odds greatly favoring</a> another 0.25 percentage point increase – which <a href="https://www.federalreserve.gov/monetarypolicy/openmarket.htm">would be the 10th straight hike</a> since March 2022. </p>
<p>With the inflation rate still well above the Fed’s target of about 2%, combined with continued job growth and a low unemployment rate, the central bank is likely not done ratcheting up rates. I agree with the market odds pricing in a quarter-point hike for the May meeting. Future data will guide any future rate increases beyond that. </p>
<p>The good news is that, I believe, the larger rate increases are well in the past.</p>
<h2>Landing softly – or at least mildly</h2>
<p>That brings us back to the big question: How close is the Fed to sticking a soft landing, in which the U.S. economy manages to tame inflation without a recession? </p>
<p>Sadly, it’s too early to tell. Labor markets can be very volatile and political and international events – such as <a href="https://www.brookings.edu/2023/04/24/how-worried-should-we-be-if-the-debt-ceiling-isnt-lifted/">potential gridlock on debt ceiling talks</a> or <a href="https://www.bbc.com/news/world-europe-65421341">further escalations in the Ukraine War</a> – can turn things upside down. That said, we are either looking at a mild recession or a growth recession.</p>
<p>What’s the difference? A <a href="https://www.investopedia.com/terms/g/growth_recession.asp">growth recession</a> signals a weak economy but not enough to significantly drive up unemployment – and that’s preferable to even a mild recession of multiple quarterly drops in GDP and much higher unemployment. </p>
<p>We just don’t know which is more likely. What I think is true now, though, is that, barring any catastrophic and unpredictable events, a severe recession has been avoided.</p><img src="https://counter.theconversation.com/content/204707/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Christopher Decker does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The numbers seem to be going in the ‘right’ direction for the Fed to pull off a soft landing – and avoid a recession – but the picture remains murky.Christopher Decker, Professor of Economics, University of Nebraska OmahaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2024292023-03-23T15:34:16Z2023-03-23T15:34:16ZFederal Reserve’s ‘soft landing’ goal has become bumpier with rate hike plan hit by bank turbulence<figure><img src="https://images.theconversation.com/files/517215/original/file-20230323-1492-doyl0m.jpg?ixlib=rb-1.1.0&rect=219%2C38%2C8407%2C5703&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A recession-free landing for the Fed may be harder now.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/APTOPIXFederalReserve/86b98843c9f241c79c9ebeeced4fdc78/photo?Query=powell&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=18017&currentItemNo=1">AP Photo/Alex Brandon</a></span></figcaption></figure><p>Federal Reserve policymakers have targeted a “<a href="https://www.npr.org/2022/07/24/1112770581/inflation-recession-soft-landing-rates-jobs-fed">soft landing</a>” for the U.S. economy since beginning their effort a year ago to tame runaway inflation by hiking interest rates. That is, they believed they could do so without sending the U.S. into recession. </p>
<p>But the Fed’s decision to <a href="https://theconversation.com/federal-reserve-bows-to-bank-crisis-fears-with-quarter-point-rate-hike-letting-up-a-little-in-its-fight-against-inflation-202307?notice=Article+has+been+updated.">raise rates by a quarter point on March 22, 2023</a>, and <a href="https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20230322.pdf">modestly lift its projection</a> for how much higher they will go in 2024 does little to ease the <a href="https://www.cnbc.com/2023/03/13/analysts-main-concern-with-regional-bank-stocks-deposit-flight.html">growing concerns about the health</a> of regional banks. </p>
<p>As an <a href="https://scholar.google.com/citations?user=Liju3o8AAAAJ&hl=en&oi=ao">economist who studies the macroeconomy</a>, I believe this makes the soft landing scenario less likely.</p>
<h2>Squeezing regional banks</h2>
<p>The Fed’s latest moves suggest policymakers don’t expect the banking sector stress to spill over into the broader economy. </p>
<p>Had it believed so, it probably would have paused its rate hikes entirely.</p>
<p>Chair Jerome Powell, in a press conference following the announcement, <a href="https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20230322.pdf">assured the public</a> that the banking system is strong, sound, resilient and has ample capital.</p>
<p>But the hike, paired with the acknowledgment of banking sector uncertainty, acts against those very assurances by creating additional stress. It will shrink lenders’ profit margins as the cost of funding continues to rise and tighter credit conditions force banks to dial back on lending. </p>
<p>This will be felt most by smaller regional banks and the communities they serve. Regional banks are a <a href="https://www.federalreserve.gov/newsevents/speech/kroszner20070305a.htm">valuable source of credit</a> for small businesses and mortgage lenders. As credit conditions tighten, it is becoming more likely the Fed may have been too aggressive in raising rates over the past year. </p>
<p>And while the Fed has said it stands at the ready to provide liquidity to banks, that <a href="https://www.cnbc.com/2023/03/22/pacwest-falls-10percent-after-regional-bank-discloses-deposit-outflows-additional-liquidity.html">won’t stop depositors</a> from moving their money into safer institutions offering higher returns – which increases the risk of further <a href="https://www.cnn.com/2023/03/15/economy/big-banks-deposit-spike-svb/index.html">bank runs</a>, similar to those that felled Silicon Valley Bank. </p>
<h2>Recession risks rising</h2>
<p>In congressional testimony also on March 22, Treasury Secretary Janet Yellen said the U.S. <a href="https://www.nbcnews.com/business/business-news/us-not-considering-blanket-insurance-bank-deposits-yellen-says-rcna76210">has no plans to provide</a> “blanket insurance” for all deposits regardless of size – the current limit is US$250,000 – after <a href="https://www.bloomberg.com/news/articles/2023-03-21/us-studies-ways-to-guarantee-all-bank-deposits-if-crisis-expands">earlier reports suggested that it might</a> do just that. </p>
<p><a href="https://www.bloomberg.com/news/articles/2023-03-22/dueling-powell-and-yellen-feeds-was-lot-for-stock-market-to-digest?sref=Hjm5biAW">Markets reacted badly</a> to this news, coming at about the same time as the Fed decision.</p>
<p><a href="https://www.bloomberg.com/news/articles/2023-03-22/ackman-warns-of-accelerated-deposit-outflows-after-fed-decision?cmpid=BBD032323_MKT&utm_medium=email&utm_source=newsletter&utm_term=230323&utm_campaign=markets&sref=Hjm5biAW">Investors such as Bill Ackman worried</a> this will lead to an acceleration of deposits fleeing regional banks.</p>
<p>In the end, I believe the rate hike will cause more harm in the banking sector than the Fed anticipates. And this reduces the likelihood of a soft landing – and increases the odds of recession.</p><img src="https://counter.theconversation.com/content/202429/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ryan Herzog does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Fed’s decision to raise rates is likely to put more pressure on regional banks, which will make it harder to avoid a recession.Ryan Herzog, Associate Professor of Economics, Gonzaga UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1989752023-02-05T03:08:42Z2023-02-05T03:08:42ZHigher interest rates, falling home prices and real wages, but no recession: top economists’ forecasts for 2023<figure><img src="https://images.theconversation.com/files/508174/original/file-20230205-13-n69h0m.png?ixlib=rb-1.1.0&rect=317%2C0%2C3676%2C1982&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Wes Mountain/The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>Australia’s Reserve Bank is set to push up rates once again at its first meeting for the year on Tuesday, according to <a href="https://cdn.theconversation.com/static_files/files/2528/2023CONVERSATIONFORECASTING_SURVEYResponses.pdf">all but two</a> of the 29 leading economists surveyed by The Conversation at the start of 2023. </p>
<p>Those experts predict we will still be living with higher rates by the end of the year, although they should start to come down in 2024.</p>
<p>Their average forecast is an increase in the bank’s <a href="https://www.rba.gov.au/statistics/cash-rate/">cash rate target</a> from 3.1% to 3.6% during 2023. That’s enough to add an extra A$190 to the monthly cost of servicing a $600,000 variable mortgage, bringing the total increase in the cost of servicing such a mortgage since the bank began hiking rates in May 2022 to more than $1,000.</p>
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<p>All but three of the specialists surveyed expect the Reserve Bank’s cash rate target to peak during 2023, and on average the panel expects it to fall back to close to its present level during 2024.</p>
<p>Panelist Jo Masters of Barrenjoey Capital says the bank’s keenness to bring down inflation will be tempered by the knowledge that a large number of borrowers are set to exit the very cheap three-year fixed-rate loans they took out early in the pandemic and are facing very steep increases indeed.</p>
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<p>The highest forecast for a peak in the cash rate is from former Reserve Bank research manager Peter Tulip, who expects a cash rate of 5% by December 2024 – enough to add a further $725 to the monthly cost of servicing a $600,000 mortgage.</p>
<p>The panel assembled by The Conversation includes macroeconomists, economic modellers, former Treasury, International Monetary Fund and financial market economists, and a former member of the Reserve Bank board. </p>
<p>Most expect inflation to fall sharply from here on, with all but five believing the quarterly rate will turn out to have peaked at 7.8% in <a href="https://theconversation.com/with-inflation-still-rising-the-rba-will-almost-certainly-lift-interest-rates-in-february-198504">December 2022</a>.</p>
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<p>Financial markets economist Warren Hogan says the food and fuel prices pushed up by Russia’s invasion of Ukraine are already falling, and the only question is how quickly inflation falls, and how soon it returns to the Reserve Bank’s <a href="https://www.rba.gov.au/inflation/inflation-target.html">2-3%</a> target band.</p>
<p>Former federal Labor minister Craig Emerson says, unlike in the 1970s, wage rises aren’t helping sustain inflation. Then, more than half the Australian workforce was unionised and wage setting was centralised. Today only <a href="https://www.abs.gov.au/statistics/labour/earnings-and-working-conditions/trade-union-membership/latest-release">one-eighth</a> of the workforce is unionised and most wages are not set centrally.</p>
<p>The panel expects real wages to go backwards for the third consecutive year in 2023, as wages growth of 3.9% is overpowered by prices growth of 4.5%.</p>
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<p>Wage growth is expected to fall back to 3.6% in 2024 as the economy weakens and as an increase in immigration helps fill labour shortages. But the average forecast is wage growth to outstrip price rises next year for the first time since 2020, as inflation falls back to 3.2%.</p>
<h2>Recession unlikely at home, more likely abroad</h2>
<p>The panel assigns a 26% probability to a <a href="https://www.rba.gov.au/education/resources/explainers/recession.html">recession</a> in the next two years, an increase on the <a href="https://theconversation.com/sky-high-mortgages-7-1-inflation-and-a-20-chance-of-recession-how-the-conversations-panel-sees-the-year-ahead-185411">20%</a> it assigned in mid-2022.</p>
<p>Former Department of Foreign Affairs and Trade chief economist Jenny Gordon says if Europe goes into a recession in its 2023-24 winter and China’s recovery is slow, a recession in Australia will become more likely.</p>
<p>While the panel expects China’s decision to end COVID lockdowns will lift its growth rate from 3% in 2022 to 4.7% in 2023, it does not expect anything like a return to the previous growth rates of 8% or more. </p>
<p>Industry economist Julie Toth says China is facing resource depletion and <a href="https://theconversation.com/chinas-population-is-now-inexorably-shrinking-bringing-forward-the-day-the-planets-population-turns-down-198061">population decline</a>, as well as a cyclical downturn in industrial and residential investment. COVID-19 presents an immediate threat to its people and economy.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/chinas-population-is-now-inexorably-shrinking-bringing-forward-the-day-the-planets-population-turns-down-198061">China's population is now inexorably shrinking, bringing forward the day the planet's population turns down</a>
</strong>
</em>
</p>
<hr>
<p>The panel assigns a 42% probability to a recession in the United States within the next two years, a 57% probability to a recession in the European Union, and a 73% probability to a recession in the United Kingdom.</p>
<p>Four of the economists surveyed believe the UK recession has already started. As in the US, it is likely to result from the run of interest rate increases put in place to contain inflation. </p>
<p>University of Tasmania economist Mala Raghavan expects the US to skirt an outright recession and instead experience a “rolling recession”, in which different parts of the economy take time to turn down.</p>
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<p>KPMG forecaster Sarah Hunter says while Australia should avoid a recession as commonly described (two consecutive quarters in which production shrinks) economic growth could well turn negative for one quarter at the start of the year, as household spending turns down and mining shipments are disrupted by floods.</p>
<p>Regardless, the economy will be “very weak by historic standards” in 2023. The panel expects economic growth of only 1.7% in 2023, climbing to 2.5% by 2026.</p>
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<p>The panel is forecasting very weak growth in household spending of <a href="https://cdn.theconversation.com/static_files/files/2528/2023CONVERSATIONFORECASTING_SURVEYResponses.pdf">2.2%</a> over the year to December, and a further decline in the household saving ratio from 6.9 to 5.1%.</p>
<p>Non-mining business investment is expected to hold up, climbing 2.8% over the year to December, up from 1.75%. Mining investment is expected to climb 3.4%, with much depending on demand from the rest of the world.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/how-housing-made-rich-australians-50-richer-leaving-renters-and-the-young-behind-and-how-to-fix-it-195189">How housing made rich Australians 50% richer, leaving renters and the young behind – and how to fix it</a>
</strong>
</em>
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<p>Home prices are expected to fall further in 2023 in response to higher interest rates, slipping another 7% in Sydney and 6% in Melbourne. </p>
<p>AMP economist Shane Oliver says the buying power of someone on average full-time earnings with a 20% deposit has fallen by more than one quarter as a result of interest rate hikes, and prices are yet to fully reflect this.</p>
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<h2>Jobs to hold up</h2>
<p>Australia’s unemployment rate dipped below 4% for the first time in five decades in 2022. It is expected to stay below 4% (at 3.96%) in 2023 and then remain below 5% in 2024 even as immigration builds up, in part because low unemployment has made <a href="https://theconversation.com/why-unemployment-is-set-to-stay-below-5-for-years-to-come-188705">previously unemployed Australians employable</a>.</p>
<p>As former Deloitte Access director Chris Richardson puts it, previously hard to employ Australians have been “polishing their skills and their resumes”.</p>
<p>Federation University economist Margaret McKenzie also points to the large amount of <a href="https://theconversation.com/an-extra-60-600-australians-found-work-in-may-heres-why-wages-arent-moving-much-184929">sick leave</a> being taken, creating demand for workers to fill the gaps.</p>
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<p>On average, the panel is expecting a flat share market in the year ahead, but the forecasts range from growth of 8% to a decline of 17%, led down by weaker bank stocks and household spending as interest rate increases bite. </p>
<p>The panel expects the iron ore price to remain roughly steady at US$105 throughout 2023, rather than falling to the US$55 assumed in the budget.</p>
<p>Partly as a result, the panel is forecasting a budget deficit of <a href="https://cdn.theconversation.com/static_files/files/2528/2023CONVERSATIONFORECASTING_SURVEYResponses.pdf">A$29.4 billion</a> in 2022-23, down from the officially forecast $36.9 billion.</p>
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<h2>The Conversation’s Economic Panel</h2>
<p><em>Click on economist to see full profile.</em></p>
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<p><strong><a href="https://cdn.theconversation.com/static_files/files/2528/2023CONVERSATIONFORECASTING_SURVEYResponses.pdf">Download the 2023 economic survey</a></strong></p><img src="https://counter.theconversation.com/content/198975/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Conversation’s 29-member panel expects very weak economic growth and recessions in much of the rest of the world, but there’s good news down the track for Australians’ buying power.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1991092023-02-02T18:45:23Z2023-02-02T18:45:23ZUK to perform worst of major economies in 2023, says IMF – here’s how to achieve long-term growth<figure><img src="https://images.theconversation.com/files/507848/original/file-20230202-5680-g7bczh.jpg?ixlib=rb-1.1.0&rect=80%2C74%2C4378%2C2809&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Golden Dayz/Shutterstock</span></span></figcaption></figure><p>The International Monetary Fund (IMF) has produced another <a href="https://www.imf.org/en/Publications/WEO/Issues/2023/01/31/world-economic-outlook-update-january-2023">dismal forecast for the UK economy</a>. The IMF expects it to contract by 0.6% in 2023, whereas all other major economies are expected to grow – including sanctions-hit Russia. Meanwhile the <a href="https://www.bankofengland.co.uk/monetary-policy-report/2023/february-2023">Bank of England expects</a> the UK economy will be no larger in 2026 than it was in 2019.</p>
<p>The growth of the economy is a key sign of prosperity, but the most important indicator is the growth of productivity, or output per worker.</p>
<p>“Productivity isn’t everything, but in the long run, it’s almost everything,” the Nobel prize-winning economist <a href="https://blogs.worldbank.org/psd/productivity-prosperity-long-run-it-almost-everything">Paul Krugman observed</a> in his book The Age of Diminished Expectations. It is so important because it is the main driver of growth in real wages, corporate profits and tax revenues.</p>
<p>Productivity growth has been <a href="https://twitter.com/RichardALJones/status/1618880919674421248">stagnant in the UK</a> since the 2008 global financial crisis. This has also been the case in other high-income countries, but UK productivity performance is <a href="https://www.ons.gov.uk/economy/economicoutputandproductivity/productivitymeasures/bulletins/internationalcomparisonsofproductivityfinalestimates/2021">near the bottom</a> of the league table of the G7 advanced economies. More importantly, the UK government does not have any coherent ideas about how to address the problem.</p>
<p>According to the IMF, the UK is the <a href="https://www.imf.org/en/Publications/WEO/weo-database/2022/October/weo-report?c=512,914,612,171,614,311,213,911,314,193,122,912,313,419,513,316,913,124,339,638,514,218,963,616,223,516,918,748,618,624,522,622,156,626,628,228,924,233,632,636,634,238,662,960,423,935,128,611,321,243,248,469,253,642,643,939,734,644,819,172,132,646,648,915,134,652,174,328,258,656,654,336,263,268,532,944,176,534,536,429,433,178,436,136,343,158,439,916,664,826,542,967,443,917,544,941,446,666,668,672,946,137,546,674,676,548,556,678,181,867,682,684,273,868,921,948,943,686,688,518,728,836,558,138,196,278,692,694,962,142,449,564,565,283,853,288,293,566,964,182,359,453,968,922,714,862,135,716,456,722,942,718,724,576,936,961,813,726,199,733,184,524,361,362,364,732,366,144,146,463,528,923,738,578,537,742,866,369,744,186,925,869,746,926,466,112,111,298,927,846,299,582,487,474,754,698,&s=PPPGDP,&sy=2020&ey=2027&ssm=0&scsm=1&scc=0&ssd=1&ssc=0&sic=0&sort=country&ds=.&br=1">ninth biggest economy</a> in the world (according to purchasing power parity, which accounts for varying currency strengths). But the World Economic Forum <a href="https://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf">ranks the UK 61st out of 141 countries</a> in terms of the government’s “long-term vision”. If this institutional myopia is not addressed, the UK will continue to drop down the productivity performance league.</p>
<h2>Soundbites vs policy</h2>
<p>In a recent speech, UK chancellor Jeremy Hunt <a href="https://www.gov.uk/government/speeches/chancellor-jeremy-hunts-speech-at-bloomberg">outlined his “vision”</a> for the UK economy which consisted of “the four ‘Es’ of economic growth and prosperity”: enterprise, education, employment and everywhere. But behind the rhetoric and slogans, there was no strategy or policy that would actually increase productivity. Kitty Ussher, chief economist at the Institute of Directors, added a fifth item to the chancellor’s list – an E for “<a href="https://www.ft.com/content/26e2a00e-6888-42de-8028-10685465253c">empty</a>”.</p>
<p>Of course, this is not the first time that politicians have resorted to slogans and banalities to mask a lack of economic content. Boris Johnson’s government used “build back better”. Even Johnson himself could not resist <a href="https://www.independent.co.uk/tv/news/boris-johnson-makes-bizarre-build-back-better-puns-at-tory-party-conference-b2188590.html">mocking</a> this slogan. </p>
<p>Gordon Brown, UK chancellor from 1997 to 2007, took his slogans far more seriously. In 1994, he said that <a href="https://academic.oup.com/cje/article/31/6/805/1691191?login=true#no-access-message%23no-access-message">New Labour’s economic policy</a> would be based on “post-neoclassical endogenous growth theory”. Aside from being unintelligible to most people, that phrase even befuddled economists who understood <a href="https://corporatefinanceinstitute.com/resources/economics/endogenous-growth-theory/">endogenous growth</a> but didn’t know what the “post” prefix meant. Showing his populist instincts, Tony Blair translated Brown’s slogan as “<a href="https://www.theguardian.com/politics/2001/may/23/labour.tonyblair">education, education, education</a>”.</p>
<h2>UK problems – and solutions</h2>
<p>Moving beyond slogans and soundbites, the <a href="https://www.sciencedirect.com/science/article/abs/pii/0304393288901687">conventional wisdom of modern economics</a> tells us that key drivers of productivity growth are: </p>
<ul>
<li>investment in physical capital (the machinery, equipment and structures that can produce goods and services);</li>
<li>investment in human capital (education and training), innovation and technology;</li>
<li>and institutions that foster growth and development.</li>
</ul>
<p>The UK needs to address problems in all three areas.</p>
<p><strong>1. Insufficient capital investment</strong></p>
<p>Investment by both the private and public sectors will allow more goods and services to be produced in the future. But the UK has persistently <a href="https://www.instituteforgovernment.org.uk/sites/default/files/publications/business-investment.pdf">low levels of capital investment</a> compared to other advanced economies.</p>
<p>In the private sector, this low level of investment reflects economic and policy instability. This instability has been reinforced by Brexit, COVID and the war in Ukraine, but it also reflects a lack of long-term industrial policy and a financial system that emphasises dividends and share buy-backs over patient long-term investment.</p>
<p>A lack of investment in infrastructure by both the public and private sectors has also hindered long-term growth. There are deficiencies in the transport, energy and sewage systems and a need to properly address climate change. </p>
<p>The UK has established a state-owned <a href="https://www.ukib.org.uk/about-us">Infrastructure Investment Bank</a> to “finance a green industrial revolution and drive growth across the country”. But the bank is too small scale.</p>
<p>According to a January 2023 report from Westminster’s <a href="https://committees.parliament.uk/publications/33633/documents/183968/default/">Public Accounts Committee</a>, 18 months after its launch the bank had only deployed “£1 billion of its £22 billion capital to 10 deals”, and had employed just 16 permanent staff “against a target of 320”. The committee also said it was “not convinced the bank has a strategic view of where it best needs to target its investments”.</p>
<p><strong>2. Weaknesses in the innovation system</strong></p>
<p>Innovation policy in the UK focuses on how to generate new technologies including spending more on R&D. The government target for this is 2.4% of GDP (based on the OECD average in 2018). It continually failed to meet this until the way the data was collected was <a href="https://www.nature.com/articles/d41586-022-04173-7">substantially revised</a>.</p>
<p>A important inadequacy of UK innovation policy is the <a href="https://academic.oup.com/cjres/article/12/2/293/5523674?login=true#no-access-message%23no-access-message">lack of focus on the diffusion</a> of new technologies. A new technology does not have the most economic impact when it is developed, but <a href="https://www.technologyreview.com/2002/03/01/235222/wal-mart-trumps-moores-law/">once it is widely used</a>.</p>
<p>This diffusion of innovation can be difficult, costly and take time, however. And implementation in the UK has been hindered by a range of factors including <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/868334/CST_Technologies_for_productivity_letter.pdf">deficiencies in company management</a>, a lack of technical knowledge and risk aversion by companies.</p>
<p><strong>3. Institutional deficiencies</strong></p>
<p>Identifying the appropriate policies is necessary, but not sufficient, to address the productivity problem. An institutional framework is needed to see that policies are implemented effectively over time. The UK lacks such an effective and powerful institution that will focus on growth and productivity. </p>
<p>The Treasury is the dominant government department in this area but its focus is on short-term fiscal sustainability, what some call “<a href="https://www.theguardian.com/books/2022/may/16/the-big-idea-should-we-abolish-the-treasury">government by accountants</a>”. In 1964, the Wilson government established the Department of Economic Affairs (DEA) to promote economic growth. This Department, with its long-run remit, <a href="https://www.tandfonline.com/doi/abs/10.1080/13619469708581438?casa_token=_N5bf0bMv9cAAAAA:ykEYedwTCQf5zx7iMFakY8gC8pjhb-S1FLuOJg-Z4l7YcnGQlu_wTCSKb4GrhOqvSp2rzYui6BWh">lasted just five years</a>. The Treasury reasserted its monopoly power over economic policy in 1969.</p>
<p>In the political domain, many politicians are primarily preoccupied with being re-elected in the next few years and are less concerned with what the economy and society will look like in the more distant future.</p>
<p>The UK is blighted by systemic short-termism; it needs long-term vision and institutional stability to secure productivity growth.</p><img src="https://counter.theconversation.com/content/199109/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Kitson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>UK policymakers and industry need to set their sights on the long-term picture to boost productivity and help grow the economy.Michael Kitson, Associate Professor in International Macroeconomics, Cambridge Judge Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1967402023-01-05T14:59:28Z2023-01-05T14:59:28ZGlobal economy 2023: how countries around the world are tackling the cost of living crisis<figure><img src="https://images.theconversation.com/files/503205/original/file-20230105-22-p9kpo5.jpg?ixlib=rb-1.1.0&rect=59%2C22%2C4922%2C3458&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Many countries are dealing with a rapidly rising cost of living.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/rising-cost-living-inflation-financial-crisis-2172152013">Billion Photos/Shutterstock</a></span></figcaption></figure><p><em>The <a href="https://www.imf.org/en/Publications/WEO/Issues/2022/10/11/world-economic-outlook-october-2022">rising cost of living</a> is biting businesses and households around the world. Editors from across The Conversation’s international network have asked local academic experts to explain how their countries and regions are tackling this issue, as well as the 2023 outlook for prices and interest rates where they live.</em></p>
<p><em>This article is the third in our series on where the global economy is heading in 2023. It follows recent articles on <a href="https://theconversation.com/global-economy-2023-why-central-banks-face-an-epic-battle-against-inflation-amid-political-obstacles-197088">inflation</a> and <a href="https://theconversation.com/global-economy-2023-how-governments-could-make-the-energy-crisis-worse-this-year-196986">energy</a>.</em></p>
<h2>UK: recession on the horizon</h2>
<p><em>Alan Shipman, Senior Lecturer in Economics, The Open University</em></p>
<p>At first sight, the UK’s cost of living crisis might look fairly mild compared to other countries. Its inflation rate was 10.7% in November 2022, <a href="https://ec.europa.eu/eurostat/documents/2995521/15701156/2-16122022-AP-EN.pdf/4eaa941a-8c7d-af89-37da-f29f1167c24c">compared to</a> 12.6% in Italy, 16.% in Poland and over 20% in Hungary and Estonia. But the Bank of England expects a recession in the UK this year – possibly <a href="https://www.theguardian.com/business/2022/nov/03/bank-england-warn-uk-economy-longest-recession-100-year-raise-rate-three-percent">lasting until mid-2024</a>.</p>
<p>This is because the proportion of UK households that lack insulation against financial setbacks is unusually large for a wealthy economy. One pre-pandemic survey found that <a href="https://www.reuters.com/article/britain-homeless-housing-idUKL5N2692VV">3 million people in the UK would fall into poverty</a> if they missed one pay cheque, with the country’s high housing costs being a key source of vulnerability. Another recently suggested that <a href="https://www.citizensadvice.org.uk/about-us/about-us1/media/press-releases/a-third-of-uk-adults-just-20-away-from-falling-into-crisis-warns-citizens-advice/#:%7E:text=warns%20Citizens%20Advice-,A%20third%20of%20UK%20adults%20just%20%C2%A320%20away,into%20crisis%2C%20warns%20Citizens%20Advice&text=New%20analysis%20from%20Citizens%20Advice,head%20into%20the%20new%20year">one-third of UK adults would struggle</a> if their costs rose by just £20 a month.</p>
<p>The pandemic saw over 4 million households <a href="https://www.jrf.org.uk/report/dragged-down-debt-millions-low-income-households-pulled-under-arrears-while-living-costs-rise">take on extra debt</a> with almost as many falling behind on repaying it. And recent jumps in energy and food bills will push many over the edge, especially if heating costs remain high when the present <a href="https://www.instituteforgovernment.org.uk/explainers/energy-price-cap">government cap on energy prices</a> ends in April.</p>
<p>UK governments have been stealthily raising taxes since 2010 and in real terms (adjusting for inflation) typical UK household income was already <a href="https://www.resolutionfoundation.org/app/uploads/2022/07/Living-Standards-Audit-2022.pdf">2% lower in 2018 than in 2007</a>. But real incomes have been further eroded over the past year since the UK’s 10.7% inflation rate (as of November) is far above the pay increases many employees have had to settle for in recent months. </p>
<p>But recent events have forced the government to make decisions that were not necessarily aligned with the looming recession. In September 2022, Liz Truss became prime minister with bold <a href="https://www.telegraph.co.uk/business/2022/08/18/liz-truss-right-britain-has-productivity-crisis-why/">pledges to cure the UK’s economic malaise</a>. The global financial markets responded dramatically to her tax cutting plans by hiking the interest they charge the UK government and businesses to borrow. This forced the newly installed chancellor Jeremy Hunt to embark on another round of public spending cuts and <a href="https://ifs.org.uk/articles/are-we-new-era-austerity">tax increases</a> in November – actions governments usually reserve for the height of a boom, not the eve of a slump. </p>
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Read more:
<a href="https://theconversation.com/how-bonds-work-and-why-everyone-is-talking-about-them-right-now-a-finance-expert-explains-191550">How bonds work and why everyone is talking about them right now: a finance expert explains</a>
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<figure class="align-center ">
<img alt="A union jack, British flag, flies above the bank of england building in London." src="https://images.theconversation.com/files/503092/original/file-20230104-129706-1ae668.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/503092/original/file-20230104-129706-1ae668.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/503092/original/file-20230104-129706-1ae668.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/503092/original/file-20230104-129706-1ae668.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/503092/original/file-20230104-129706-1ae668.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/503092/original/file-20230104-129706-1ae668.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/503092/original/file-20230104-129706-1ae668.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Bank of England, London.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/bank-england-your-travel-concept-704695771">aslysun / Shutterstock</a></span>
</figcaption>
</figure>
<p>The Bank of England is also doing the opposite of what central banks prefer to do before a downturn. High inflation forced it to raise rates to <a href="https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate">3.5% in December</a>, with more rises expected in 2023. This boosts debt repayments for the millions who’ve borrowed to buy their homes, not to mention those with unsecured credit card or overdraft debt. </p>
<p>All of these additional costs subtract from a household’s disposable income. And because household consumption makes up <a href="https://commonslibrary.parliament.uk/research-briefings/sn02787/#:%7E:text=GDP%20by%20Expenditure,of%20the%20total%20in%202021">close to 60%</a> of all spending in the UK economy, this will inevitably lead to recession – which could well turn out to be very painful and very long.</p>
<h2>US: central bank signals caution</h2>
<p><em>John W. Diamond, Director of the Center for Public Finance at the Baker Institute, Rice University</em></p>
<p><a href="https://www.bls.gov/news.release/cpi.nr0.htm">Inflation increased significantly</a> in the US in late 2021 and early 2022, reaching levels higher than at any time in the last 40 years. The Federal Reserve responded by <a href="https://www.federalreserve.gov/monetarypolicy/openmarket.htm">aggressively raising its benchmark rate</a> (the federal funds rate) seven times since March in an effort to stabilise prices. A couple of <a href="https://www.forbes.com/sites/simonmoore/2022/12/15/fed-sees-further-hikes-in-2023-heres-what-could-change-that/?sh=67ad46c15a17">smaller increases</a> are expected in 2023. </p>
<p>The US consumer price index, a standard measure of inflation, <a href="https://fred.stlouisfed.org/series/CPIAUCSL#0">shows that prices peaked</a> in June 2022, increasing by 9.1% over the previous year. The index has decreased every month since June, with the November data – the most recent available – indicating that US prices are 7.1% over the prior 12 months.</p>
<p>The <a href="https://fred.stlouisfed.org/series/FEDFUNDS">fed funds rate</a> serves as a benchmark for other interest rates, such as mortgage rates. Its recent increases have started to reduce demand for goods and services and investment. For example, existing home sales in November were <a href="https://www.nar.realtor/research-and-statistics/housing-statistics/existing-home-sales">7.7% lower than in October</a> and are down over a third from a year earlier. The underlying reason is that mortgage interest rates <a href="https://fred.stlouisfed.org/series/MORTGAGE30US">have more than doubled to over 6%</a>, after reaching 7% in October, from 3% in the beginning of 2021. </p>
<p>The ripple effects of the reduction in housing demand will continue to slow economic activity for months to come because some of the impacts of monetary policy occur with a lag.</p>
<figure class="align-center ">
<img alt="A for sale sign outside a family house." src="https://images.theconversation.com/files/503095/original/file-20230104-129741-tpygfq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/503095/original/file-20230104-129741-tpygfq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/503095/original/file-20230104-129741-tpygfq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/503095/original/file-20230104-129741-tpygfq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/503095/original/file-20230104-129741-tpygfq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/503095/original/file-20230104-129741-tpygfq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/503095/original/file-20230104-129741-tpygfq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">US housing demand is falling.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/sale-sign-outside-family-house-1576779889">Juice Flair / Shutterstock</a></span>
</figcaption>
</figure>
<p>The Fed <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20221214a.htm">is now signalling</a> that it will continue to raise interest rates in early 2023 before pausing, a cautious approach that is justified by a variety of economic data. This is partly due to continued <a href="https://fred.stlouisfed.org/series/UNRATE">strength in the labour market</a> as unemployment remains low, wages that haven’t been adjusted for inflation <a href="https://www.bls.gov/ces/">continuing to rise</a>, and roughly 10 million jobs remaining open, according to the latest data. To the extent that companies have to raise wages to attract or keep workers, this may lead to higher prices and persistent inflation. </p>
<p>This issue is especially important given the <a href="https://acl.gov/sites/default/files/aging%20and%20Disability%20In%20America/2020Profileolderamericans.final_.pdf">ageing population</a> in the US and the effect it has on the labour market. At the same time, the recent <a href="https://www.theguardian.com/environment/2022/dec/29/european-gas-prices-fall-to-pre-ukraine-war-level">fall in energy prices</a> is unlikely to continue, so further reductions in inflation will have to come from declines in other areas, such as shelter and food. </p>
<h2>Australia and New Zealand: using restraint to ease inflation</h2>
<p><em>Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University</em></p>
<p>The regular survey of economic forecasts published by The Conversation Australia at the start of 2022 was <a href="https://theconversation.com/top-economists-expect-rba-to-hold-rates-low-in-2022-as-real-wages-fall-175054">titled</a>: Top economists expect RBA to hold rates low in 2022 as real wages fall.</p>
<p>This forecast for how the Reserve Bank of Australia would set rates in 2022 was spectacularly wrong. The second part turned out to be pretty right: <a href="https://www.theguardian.com/business/grogonomics/2022/dec/22/the-year-in-australian-economics-inflation-roars-interest-rates-bite-and-real-wages-fall-off-a-cliff#:%7E:text=real%20wages%20are%20falling">real wages did fall</a>, although not because they continued to barely grow as the experts had been expecting, but because their growth was dwarfed by an explosion in inflation.</p>
<p>After hovering below the Reserve Bank’s 2-3% target band for most of the previous five years, Australia’s annual rate of inflation began 2022 at 3.5% but shot up to 5.1% in March after Russia invaded Ukraine and reached 7.3% for the year to September. The bank expects <a href="https://www.rba.gov.au/publications/smp/2022/nov/economic-outlook.html#:%7E:text=Headline%20consumer%20price%20inflation%20is%20expected%20to%20peak%20around%208%C2%A0per%C2%A0cent%20at%20the%20end%20of%202022">something close to 8%</a> for the year to December when the figures are next updated in late January.</p>
<figure class="align-center ">
<img alt="A map of New Zealand and a red plane with a flag of New Zealand attached to its wings." src="https://images.theconversation.com/files/503107/original/file-20230104-70338-iu5lp2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/503107/original/file-20230104-70338-iu5lp2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=337&fit=crop&dpr=1 600w, https://images.theconversation.com/files/503107/original/file-20230104-70338-iu5lp2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=337&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/503107/original/file-20230104-70338-iu5lp2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=337&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/503107/original/file-20230104-70338-iu5lp2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/503107/original/file-20230104-70338-iu5lp2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/503107/original/file-20230104-70338-iu5lp2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/map-new-zealand-red-plane-flag-1729818049">hyotographics / Shutterstock</a></span>
</figcaption>
</figure>
<p>Australia’s neighbour New Zealand has experienced much the same thing, with an <a href="https://www.stats.govt.nz/news/annual-inflation-at-7-2-percent/#:%7E:text=The%20consumers%20price%20index%20increased,in%20the%20March%202022%20quarter.">inflation rate that also hit 7.3%</a> and has since slipped to 7.2%. But its response has been dramatically different.</p>
<p>Whereas Australia’s Reserve Bank increased its rate in <a href="https://www.rba.gov.au/statistics/cash-rate/#:%7E:text=369%20entries%20found-,Interest%20Rate%20Decisions,-About%20the%20cash">eight small monthly steps from May</a>, either by 0.25 or 0.5 points, New Zealand’s Reserve Bank began pushing up rates much earlier and more aggressively – including <a href="https://www.rbnz.govt.nz/monetary-policy/monetary-policy-decisions">a recent 0.75 point hike</a>, even as it forecasts a New Zealand recession.</p>
<p>In Australia – unlike New Zealand, the US, the UK and much of the rest of the developed world – a recession isn’t commonly forecast, largely because of the bank’s restraint in the face of a three-decade inflation high. This approach has served Australia well over the 29 years until the COVID recession in 2020. The country avoided the “Great Recession” after the 2007-08 global financial crisis and the 2001 “tech wreck” recession that hit the US and much of the rest of the world in 2001.</p>
<p>This restraint also reflects a belief among authorities that <a href="https://www.afr.com/policy/economy/wage-spiral-like-1970s-not-likely-again-rba-20220915-p5bic1">a wage-price spiral isn’t taking hold in Australia</a>. Wage growth remains mired at 3.1%, well below New Zealand’s 7.4%. </p>
<p>And inflationary pressure seems to be easing. Global oil and wheat prices are down one-quarter to one-third from mid-2022 peaks following Russia’s Ukraine invasion. The Reserve Bank reckons Australian inflation will slide throughout 2023, slipping to 4.7% by the end of 2023, and to 3.2% by the end of 2024, almost back to its 2-3% target band.</p>
<p>By being less hawkish than its global counterparts, the bank hopes to remain on the right side of history.</p>
<h2>France: managing price increases relatively well (for now)</h2>
<p><em>Aymen Smondel, Maître de conférences en finance and Mohamad Hassan Shahrour, Maître de Conférences en Finance, Université Côte d'Azur, IAE Nice - Université Côte d'Azur</em></p>
<p>Inflation is an area where France appears to be more resilient than its neighbours. In December 2022, the country’s inflation rate (measured by the consumer price index) was 6.1%, compared with <a href="https://data.oecd.org/fr/price/inflation-ipc.htm">10% in Germany, 11.8% in Italy and 9.3% in the UK</a>.</p>
<p>The main challenge facing countries, and contributing to inflation – or even <a href="https://theconversation.com/1970s-style-stagflation-now-playing-on-central-bankers-minds-185868">stagflation</a> (which refers to a combination of inflation and low economic growth) in the case of some economies – is the huge increase in energy prices in recent years.</p>
<p>Faced with this rise, the total French state budget devoted to mitigating household energy bills is set to reach at least <a href="https://www.lemonde.fr/energies/article/2022/09/14/crise-energetique-l-executif-debloque-45-milliards-d-euros-pour-prolonger-le-bouclier-tarifaire_6141645_1653054.html">€75 billion</a> (£66 billion) across 2022 to 2023, through schemes including <a href="https://www.service-public.fr/particuliers/actualites/A15480?lang=en">energy vouchers and a tariff shield</a>.</p>
<p>These actions have kept the inflation rate well below that of most European economies. In addition, France is less reliant on fossil fuel products, and therefore less vulnerable to energy price fluctuations. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/503026/original/file-20230104-22-tnm2gc.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Line graph showing that France's use of nuclear for electricity production is significantly higher than that of the UK and Germany." src="https://images.theconversation.com/files/503026/original/file-20230104-22-tnm2gc.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/503026/original/file-20230104-22-tnm2gc.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=502&fit=crop&dpr=1 600w, https://images.theconversation.com/files/503026/original/file-20230104-22-tnm2gc.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=502&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/503026/original/file-20230104-22-tnm2gc.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=502&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/503026/original/file-20230104-22-tnm2gc.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=630&fit=crop&dpr=1 754w, https://images.theconversation.com/files/503026/original/file-20230104-22-tnm2gc.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=630&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/503026/original/file-20230104-22-tnm2gc.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=630&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://ourworldindata.org/electricity-mix">Our World in Data</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>While the chart above shows France’s use of domestic nuclear power sources, the chart below shows that other countries rely more on – often imported – fossil fuels. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/503057/original/file-20230104-22-3dekit.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Line chart showing that the UK, Germany and Italy rely much more on fossil fuels for power generation." src="https://images.theconversation.com/files/503057/original/file-20230104-22-3dekit.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/503057/original/file-20230104-22-3dekit.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=502&fit=crop&dpr=1 600w, https://images.theconversation.com/files/503057/original/file-20230104-22-3dekit.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=502&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/503057/original/file-20230104-22-3dekit.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=502&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/503057/original/file-20230104-22-3dekit.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=630&fit=crop&dpr=1 754w, https://images.theconversation.com/files/503057/original/file-20230104-22-3dekit.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=630&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/503057/original/file-20230104-22-3dekit.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=630&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://ourworldindata.org/electricity-mix">Our World in Data</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Energy issues aside, countries are also <a href="https://link.springer.com/article/10.1023/A:1009782809329">impacted by the global market</a> just like companies are affected by their <a href="https://journals.openedition.org/fcs/8844">institutional environment</a>. As a result, future changes in public policy could influence the inflation rate, which may or may not have peaked.</p>
<p>For example, the <a href="https://theconversation.com/us/topics/european-central-bank-ecb-128260">European Central Bank’s decision</a> to raise interest rates for the first time in a decade last July could weigh on countries’ budgets, giving governments less room for manoeuvre as they try to contain price increases.</p>
<p>Without some regional stability in terms of politics and economics, France may not be able to continue to outperform its neighbours in the coming months.</p>
<p><em>This is an edited excerpt from <a href="https://theconversation.com/inflation-why-france-is-holding-up-better-than-its-neighbours-for-now-192214">an article published in October 2022</a>.</em></p>
<h2>Spain: inflation, public spending, deficit and debt</h2>
<p><em>Luis Garvía Vega, Director del Máster Universitario en Gestión de Riesgos Financieros (MUGRF) en ICADE Business School, Universidad Pontificia Comillas</em></p>
<p>After beginning 2022 with <a href="https://www.ine.es/daco/daco42/daco421/ipcia1122.pdf">inflation at 6.1%</a>, Spain’s consumer price index peaked at 10.8% in July before closing out the year at a rate of 6.8%. Taking into account the 2021 inflation journey from 0.5% in January, to 2.9% in July and 6.5% in December, it now looks like price rises are being brought under control.</p>
<p>Core inflation (which excludes unprocessed food and energy) saw a more gradual but sustained rise. It was 2.4% in January 2022, peaked at 6.4% in August and fell to 6.3% in November. The closing gap with headline inflation during the final quarter of last year was mainly due to government measures to <a href="https://www.eldiario.es/economia/medidas-gobierno-energia-espana-sea-pais-zona-euro-crecen-precios_1_9758302.html">control the rise in energy prices</a>.</p>
<p><strong>Inflation in Spain, 2021-2022</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/502884/original/file-20230103-12-i5hc53.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/502884/original/file-20230103-12-i5hc53.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/502884/original/file-20230103-12-i5hc53.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=261&fit=crop&dpr=1 600w, https://images.theconversation.com/files/502884/original/file-20230103-12-i5hc53.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=261&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/502884/original/file-20230103-12-i5hc53.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=261&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/502884/original/file-20230103-12-i5hc53.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=329&fit=crop&dpr=1 754w, https://images.theconversation.com/files/502884/original/file-20230103-12-i5hc53.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=329&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/502884/original/file-20230103-12-i5hc53.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=329&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Spain’s Consumer Price Index (the figure for November 2022 refers to the leading indicator).</span>
<span class="attribution"><a class="source" href="https://www.ine.es/dyngs/INEbase/en/operacion.htm?c=Estadistica_C&cid=1254736176802&menu=ultiDatos&idp=1254735976607">National Statistics Institute (INE), Spain</a></span>
</figcaption>
</figure>
<p>Like many other countries, <a href="https://datosmacro.expansion.com/estado/gasto/espana#:%7E:text=El%20gasto%20p%20C3%BAblico%20en%20Espa%20Espa%C3%B1a,51%2C9%25%20del%20GDP.">Spain lacks control and efficiency</a> when it comes to public spending. The country’s <a href="https://theconversation.com/retos-y-costes-de-la-reforma-de-las-pensiones-en-espana-174042">pension system</a> must support a rapidly growing older population; it is highly dependent on fossil fuels; the <a href="https://www.bankinter.com/blog/economia/previsiones-paro-espana#:%7E:text=Previsi%C3%B3n%20paro%20Espa%C3%B1a%20en%202023%20y%202024&text=La%20Tasa%20de%20Paro%20se,la%20creaci%C3%B3n%20de%20empleo%20neto.">unemployment rate has been above 10%</a> since 2008; and – again like other countries – it is suffering from deep political and social polarisation right now. A <a href="https://www.bankinter.com/blog/economia/prevision-deficit-publico-espana">high public deficit</a> has also helped inflate the <a href="https://www.bde.es/f/webbde/GAP/Secciones/SalaPrensa/NotasInformativas/22/presbe2022_106.pdf">Spanish debt bubble</a>. </p>
<figure class="align-center ">
<img alt="Aerial view of Cibeles fountain at Plaza de Cibeles in Madrid in a beautiful summer day, Spain" src="https://images.theconversation.com/files/503091/original/file-20230104-22-xj2qsx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/503091/original/file-20230104-22-xj2qsx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/503091/original/file-20230104-22-xj2qsx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/503091/original/file-20230104-22-xj2qsx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/503091/original/file-20230104-22-xj2qsx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/503091/original/file-20230104-22-xj2qsx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/503091/original/file-20230104-22-xj2qsx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Spain’s unemployment rate has been above 10% since 2008.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/aerial-view-cibeles-fountain-plaza-de-262331123">Sergii Figurnyi / Shutterstock</a></span>
</figcaption>
</figure>
<p>But this is an election year for municipal, regional and general government and so major reforms will be difficult – particularly anything that affects Spain’s 9 million pensioners or its more than 3 million public workers.</p>
<p>Digitalisation and training could provide a solution by supporting more efficient management of resources. This could help to gauge available resources and develop ways to find savings while also addressing the needs of Spain’s people. It makes no sense that even though productivity is now higher thanks to technology, social inequality prevails. </p>
<p>Hopefully 2023 will see more discussion of digital identity and currencies or even universal income, and less of the words that characterised 2022: crisis, war and inflation.</p>
<h2>Indonesia: seven-year inflation high leads to massive layoffs</h2>
<p><em>Bhima Yudhistira Adhinegara, Direktur, Center of Economic and Law Studies (CELIOS)</em></p>
<p>While relatively low compared to other countries, Indonesia’s overall inflation rose to <a href="https://jakartaglobe.id/business/indonesia-inflation-jumps-to-the-highest-level-in-seven-years">its highest level in seven years</a>, reaching nearly 6% in September 2022. Ballooning food and subsidised fuel prices are behind this increase. </p>
<p>At the beginning of this year, Indonesia, the world’s biggest crude palm oil producer <a href="https://www.economist.com/asia/2022/04/02/indonesia-the-worlds-biggest-producer-has-a-palm-oil-crisis">struggled to control cooking oil prices</a> due to a supply bottleneck, despite enjoying <a href="https://www.thejakartapost.com/business/2022/07/24/experts-warn-of-overreliance-on-coal-cpo-in-exports.html">the financial benefits</a> of the commodity’s price increase.</p>
<figure class="align-center ">
<img alt="Banjarmasin, September 2012. A trader from lok baintan offer guava fruit in the Floating Culture Festival in Banjarmasin." src="https://images.theconversation.com/files/503210/original/file-20230105-12-nw1pdg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/503210/original/file-20230105-12-nw1pdg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=398&fit=crop&dpr=1 600w, https://images.theconversation.com/files/503210/original/file-20230105-12-nw1pdg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=398&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/503210/original/file-20230105-12-nw1pdg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=398&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/503210/original/file-20230105-12-nw1pdg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/503210/original/file-20230105-12-nw1pdg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/503210/original/file-20230105-12-nw1pdg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Rising prices for food and other commodities have impacted Indonesia’s economy.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/banjarmasin-september-2012-trader-lok-baintan-291274601">Robby Fakhriannur/Shutterstock</a></span>
</figcaption>
</figure>
<p>More generally, the <a href="https://en.tempo.co/read/1668719/mid-december-food-prices-rice-beef-and-onions-still-rising">prices of staple commodities</a> – from rice to spices – also rose on the back of failed harvests due to unpredictable weather. In addition, the ongoing war between Russia and Ukraine partially <a href="https://kumparan.com/kumparanbisnis/peternak-ayam-klaim-harga-telur-di-konsumen-saat-ini-sudah-normal-ini-alasannya-1ykUkJmRTg2">contributed to rising food prices</a>, especially food for animals, which became more expensive and affected livestock prices. The government’s decision to <a href="https://www.reuters.com/world/asia-pacific/indonesia-bites-bullet-fuel-prices-subsidies-soar-2022-09-03/">raise subsidised fuel prices by 30%</a> in September delivered a further blow to the country’s inflation rate.</p>
<p>This inflation has increased the cost of living as it has not been accompanied by a sufficient wage increases. In 2022, Indonesia’s minimum wage increased only by 1.09% – <a href="https://bisnis.tempo.co/read/1529672/pakar-ugm-sebut-rata-rata-kenaikan-ump-109-persen-terendah-sepanjang-sejarah">the lowest-ever recorded rate</a>. With annual inflation hitting 5.51%, it means that the purchasing power for those on lower incomes has declined by 4.42%. </p>
<p>Job opportunities are even more limited amid high inflation rates. Export-oriented manufacturing companies have begun to carry out <a href="https://www.cnnindonesia.com/ekonomi/20221214170325-92-887409/kemnaker-industri-manufaktur-dan-startup-paling-rentan-phk-di-2023">mass layoffs</a>. Digital startups, the hope of young people during the pandemic, have also <a href="https://jakartaglobe.id/tech/jdid-layoffs-reflect-struggles-in-indonesian-startup-industry">cut employee numbers</a>. At the same time, <a href="https://www.bps.go.id/pressrelease/2022/11/07/1916/agustus-2022--tingkat-pengangguran-terbuka--tpt--sebesar-5-86-persen-dan-rata-rata-upah-buruh-sebesar-3-07-juta-rupiah-per-bulan.html">four million new workers</a> joined the labour market between August 2021 and 2022, while Indonesia already has a <a href="https://www.macrotrends.net/countries/IDN/indonesia/youth-unemployment-rate">youth unemployment rate of 16%</a> – relatively high for southeast Asia.</p>
<p>Meanwhile, to curb inflation, the central bank <a href="https://www.cnbcindonesia.com/market/20221226071747-17-399979/dunia-putar-arah-suku-bunga-acuan-bi-loncat-jadi-55">raised interest rates by 2%</a> between July and December 2022, triggering an increase in lending rates. <a href="https://databoks.katadata.co.id/datapublish/2022/05/23/kpr-masih-jadi-pilihan-favorit-masyarakat-membeli-rumah-pada-triwulan-i-2022">More than 70% of house purchases</a> in Indonesia rely on mortgages and it might also now be more difficult for new businesses to access much-needed loans.</p>
<p>While state revenues from commodities are increasing due to the recent bonanza, inflation in 2023 is <a href="https://www.euromonitor.com/article/inflation-and-election-uncertainty-will-weigh-on-indonesian-consumers-in-2023">expected to remain high</a>, mostly due to elevated transport costs driven by volatile fuel prices. The Indonesian government now needs to rethink inflation policy and public service costs such as healthcare insurance fees and public transportation rates. These items affect most people and will trigger an additional inflationary impact.</p>
<h2>Canada: changing plans for parenthood and dating highlight cost concerns</h2>
<p><em>Wayne Simpson, Professor, Department of Economics, University of Manitoba</em></p>
<p>Like almost every other country in the world, there’s been no shortage of economic uncertainty in Canada over the past year. Russia’s invasion of Ukraine disrupted global fuel supplies, causing gas prices to reach record levels. The Bank of Canada’s aggressive interest rate hikes also caused recession jitters. Inflation and the cost of living remain big concerns for Canadians in 2023.</p>
<p>Canadians spent <a href="https://www.bnnbloomberg.ca/81-of-canadians-are-worried-about-a-recession-in-2023-survey-1.1862967">less on travel over the holiday season</a> because of these fears. And even though lower gas prices provided some relief over the same period, the price at the pumps still soared to record heights in 2022. Some experts predict they will <a href="https://www.cbc.ca/news/canada/calgary/bakx-oil-gas-fuel-evs-solar-wind-renewables-1.6693940">rise again in 2023</a>.</p>
<p>The price of groceries has also been <a href="https://abacusdata.ca/food-costs-canada-inflation/">a serious pain point</a> for Canadians, and <a href="https://www.dal.ca/sites/agri-food/research/canada-s-food-price-report-2023.html">grocery costs could soar</a> by up to 7% more in 2023. Rising food costs are in part a result of Ukraine-related disruptions in three major commodities: wheat, sunflower oil and especially fertilisers, which drove Canadian crop production costs up by 6-8% in 2022. Concerns have already been expressed about <a href="https://www.cbc.ca/news/health/food-prices-canada-health-impacts-1.6641322">the impact of rapidly rising food prices on Canadians’ health</a>, especially families with low incomes. </p>
<p>The silver lining to the economic volatility has been housing prices in Canada. Experts predict a continuing cooling trend in some of the hottest – and most unaffordable – housing markets in the country. One report forecasts <a href="https://www.bnnbloomberg.ca/td-sees-up-to-25-drop-in-canadian-home-prices-by-early-2023-1.1811945">the average price of a Canadian home could drop by 25%</a> in the first quarter 2023. Prohibitively high mortgage rates, low inventory and uncertainty about where the Bank of Canada’s interest rate cycle will finally peak could explain the slowdown.</p>
<p>Some reports suggest Canada’s higher cost of living <a href="https://financialpost.com/moneywise-pro/why-the-cost-of-living-has-some-canadians-delaying-parenthood-and-tips-for-how-to-afford-it">is even causing people to postpone parenthood</a>. And certain <a href="https://www.cbc.ca/news/business/inflation-dating-canada-1.6686287">dating apps report</a> that users are keeping dates simple and economical by suggesting casual activities rather than “fancy”, expensive or elaborate nights out.</p>
<p>The fact that prices in other G7 countries such as the US, UK, Germany and Italy <a href="https://www.ctvnews.ca/business/interest-rates-vs-inflation-rates-how-the-g7-countries-compare-to-canada-1.6139811">increased at an even faster rate than Canada in 2022</a> may be a small consolation to Canadian consumers. More sobering are <a href="https://thoughtleadership.rbc.com/past-the-peak/#:%7E:text=But%20fully%20returning%20inflation%20to,the%20end%20of%20next%20year.">forecasts of further inflation in 2023</a> before annual inflation settles back into the more familiar and comfortable range of 1-3% in 2024. </p>
<hr>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/502930/original/file-20230103-20-riy0if.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/502930/original/file-20230103-20-riy0if.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/502930/original/file-20230103-20-riy0if.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/502930/original/file-20230103-20-riy0if.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/502930/original/file-20230103-20-riy0if.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/502930/original/file-20230103-20-riy0if.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/502930/original/file-20230103-20-riy0if.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p><em>This article is part of <a href="https://theconversation.com/topics/global-economy-2023-132115">Global Economy 2023</a>, our series about the challenges facing the world in the year ahead. You might also like our Global Economy Newsletter, which you can <a href="https://theconversation.com/uk/newsletters/global-economy-and-business-115?utm_source=Global+Economy&utm_medium=linkback&utm_campaign=2023">subscribe to here</a>.</em></p><img src="https://counter.theconversation.com/content/196740/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Price inflation has hit countries differently, but most central banks and governments are concerned about the rising cost of living in 2023.Alan Shipman, Senior Lecturer in Economics, The Open UniversityAymen Smondel, Maître de conférences en finance, IAE de Nice, Université Côte d’AzurBhima Yudhistira Adhinegara, Direktur, Center of Economic and Law Studies (CELIOS)John W. Diamond, Director of the Center for Public Finance at the Baker Institute, Rice UniversityLuis Garvía Vega, Director del Máster Universitario en Gestión de Riesgos Financieros (MUGRF) en ICADE Business School, Universidad Pontificia ComillasMohamad Hassan Shahrour, Maître de Conférences en Finance, Université Côte d'Azur, IAE Nice - Université Côte d'AzurPeter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityWayne Simpson, Professor, Department of Economics, University of ManitobaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1954142023-01-04T18:59:39Z2023-01-04T18:59:39ZHow the philosophy of the past can help us imagine the economy of the future<figure><img src="https://images.theconversation.com/files/502486/original/file-20221221-13-u2pgfg.jpg?ixlib=rb-1.1.0&rect=8%2C8%2C5542%2C3692&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">It's more necessary than ever before to re-examine the fundamentals of our economic order.</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><p>The economy keeps making headlines for all the wrong reasons — stories about <a href="https://www.cbc.ca/news/business/food-price-report-1.6670597">rising prices</a>, <a href="https://www.cbc.ca/player/play/2041999427744">supply shortages</a> and a looming <a href="https://www.theguardian.com/business/2022/sep/23/unprecedented-events-creating-extremely-severe-risk-of-global-recession-economist-adam-tooze">recession</a> have been frequently making the front page these days. </p>
<p>The <a href="https://www.brookings.edu/blog/future-development/2022/03/18/inflation-could-wreak-vengeance-on-the-worlds-poor/">current economic crisis is deepening the long-standing issue of social inequality,</a> widening the gap between the rich and poor — a problem that was already accelerated by the <a href="https://www.penguinrandomhouse.com/books/301357/crashed-by-adam-tooze/">Great Recession of 2008</a> and the <a href="https://www.cbpp.org/research/poverty-and-inequality/tracking-the-covid-19-economys-effects-on-food-housing-and">economic shock brought on by the COVID-19 pandemic</a>. </p>
<p>The richest country in the world, <a href="https://www.cbo.gov/system/files/2021-08/57061-Distribution-Household-Income.pdf">the U.S.</a>, is among the most drastic examples of this trend. <a href="https://www.cfr.org/backgrounder/us-inequality-debate">Today, American CEOs earn 940 per cent more than their counterparts did in 1978</a>. A typical worker, on the other hand, only goes home with 12 per cent more money than workers from 1978 did.</p>
<p>As a <a href="https://www.epi.org/publication/ceo-compensation-2018/">report by the Economic Policy Institute</a> demonstrates, rising CEO pay does not reflect a change in the value of skills — it represents a shift in power. Over decades, American politics has undermined the bargaining power of workers by <a href="https://www.usatoday.com/story/money/cars/2014/02/20/no-south-carolina-union-jobs/5642031/">discouraging</a> and <a href="https://www.fastcompany.com/90775158/anti-union-bills-bubble-up-in-congress-despite-growing-voter-support-for-organized-labor">obstructing</a> self-organizing efforts, such as <a href="https://dx.doi.org/10.1111/j.1467-8543.2006.00518.x">unionization</a>. </p>
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<img alt="A man speaks into a megaphone in front of a crowd of protesters holding signs" src="https://images.theconversation.com/files/502482/original/file-20221221-23-3rf8m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/502482/original/file-20221221-23-3rf8m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/502482/original/file-20221221-23-3rf8m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/502482/original/file-20221221-23-3rf8m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/502482/original/file-20221221-23-3rf8m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/502482/original/file-20221221-23-3rf8m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/502482/original/file-20221221-23-3rf8m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">The Amazon Labor Union protested at the site of the DealBook Summit in New York on Nov. 30, 2022, accusing Andy Jassy, the CEO of Amazon, of union-busting.</span>
<span class="attribution"><span class="source">(AP Photo/Seth Wenig)</span></span>
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<p>The growing wealth of a minority at the expense of the majority means power is concentrated in the hands of a few people, <a href="https://inequality.org/facts/gender-inequality/#gender-wealth-gaps">mostly men</a>. It’s not surprising that figures such as <a href="https://www.cnn.com/specials/politics/january-6-insurrection">Donald Trump</a>, <a href="https://www.theguardian.com/technology/2019/mar/17/the-cambridge-analytica-scandal-changed-the-world-but-it-didnt-change-facebook">Mark Zuckerberg</a> and <a href="https://www.brookings.edu/blog/how-we-rise/2022/11/23/why-is-elon-musks-twitter-takeover-increasing-hate-speech/">Elon Musk</a> have a disproportional impact on our communities — sometimes with devastating consequences that threaten our democratic institutions.</p>
<h2>Economics with a human face</h2>
<p>It’s more necessary than ever before to re-examine the fundamentals of our economic order. The search for alternative economic models, however, is made difficult by conventional thinking patterns.</p>
<p>Many believe <a href="https://education.nationalgeographic.org/resource/socialism">we are facing a stark choice</a> between a capitalist market economy on the one hand and a socialist-planned economy on the other. </p>
<p>Although we live in a world that defines economic models in absolutist terms, it doesn’t have to be this way. We argue that the psychological and social perspectives on economy that were developed by 19th-century philosophers such as <a href="https://plato.stanford.edu/entries/hegel/">Georg Wilhelm Friedrich Hegel</a>, <a href="https://www.mqup.ca/john-stuart-mill--socialist-products-9780228005742.php">John Stuart Mill</a> and <a href="https://www.thoughtco.com/georg-simmel-3026490">Georg Simmel</a> can help us re-imagine economics with a human face. </p>
<p>These thinkers were convinced that a good economic order had to incorporate elements of classic capitalism (such as a <a href="https://www.britannica.com/topic/free-market">free market</a> in goods and services) with elements of classic socialism (such as <a href="https://democracycollaborative.org/programs/cwb">collective ownership</a> of the <a href="https://www.oxfordreference.com/view/10.1093/oi/authority.20110803100145887">means of production</a>). This is what we call <a href="https://economicpluralism.com/">economic pluralism</a>. </p>
<h2>Hegel and the problem of affluence</h2>
<p>Hegel is a good example of an economic pluralist thinker. In his <a href="https://www.cambridge.org/highereducation/books/hegel-elements-of-the-philosophy-of-right/09AE6110FE96266A206924435BAF85C5#overview">1820 <em>Philosophy of Right</em></a>, he presented an <a href="https://doi.org/10.1111/ejop.12336">extensive reflection on the modern economy</a>. He discussed the market and its operating principles, social inequality and even the formation of desires through advertisements and consumer culture. </p>
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<img alt="An oil painting of an older white man with grey hair wearing a white cravat and a fur coat" src="https://images.theconversation.com/files/502247/original/file-20221220-18-jgdche.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/502247/original/file-20221220-18-jgdche.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=781&fit=crop&dpr=1 600w, https://images.theconversation.com/files/502247/original/file-20221220-18-jgdche.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=781&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/502247/original/file-20221220-18-jgdche.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=781&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/502247/original/file-20221220-18-jgdche.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=982&fit=crop&dpr=1 754w, https://images.theconversation.com/files/502247/original/file-20221220-18-jgdche.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=982&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/502247/original/file-20221220-18-jgdche.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=982&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Georg Wilhelm Friedrich Hegel was a German philosopher and one of the founding figures of modern western philosophy.</span>
<span class="attribution"><span class="source">(Jakob Schlesinger)</span></span>
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<p>Among the many topics he examined was the <a href="https://doi.org/10.1017/apa.2021.7">problem of affluence</a>. Hegel was not just worried about the poverty created by the modern market economy, but also about the concentration of extreme wealth in few hands.</p>
<p>Writing hundreds of years before modern multi-billionaires arrived on the scene, <a href="https://www.worldcat.org/title/philosophie-des-rechts-die-vorlesung-von-181920-in-einer-nachschrift/oclc/885459313">Hegel already argued that</a> “both of these sides, poverty and affluence, represent the scourge (Verderben) of Civil Society.”</p>
<p>Hegel’s analysis is even more prescient: He believed affluence created the counter-intuitive tendency among the affluent to feel victimized and disenfranchized by society. As a result, the affluent perceived all social demands, like taxes, as unjustified incursions into their personal freedom. </p>
<p>Hegel thought this sense of victimization could lead to an unexpected bond between those at the very top of the economic pyramid and those at the bottom — a bond that overcame differences in lifestyle and mutual antipathy to form an alliance that attacks civil society from both sides. The phenomenon of <a href="https://www.politico.com/news/2020/09/22/donald-trump-union-support-snub-joe-biden-418329">Trump’s MAGA alliance</a> is an interesting modern example of this.</p>
<h2>Re-imagining the economy</h2>
<p>Unlike some later socialists, Hegel did not think problems of affluence were best rectified by introducing a planned economy that enforces wealth equality. Instead, his approach was pluralistic. </p>
<p>He made a case for a free market exchange paired with co-operative modes of production, which are — in some respects — similar to <a href="https://www.newyorker.com/business/currency/how-mondragon-became-the-worlds-largest-co-op">modern-day worker co-operatives</a>. </p>
<p>If most economic production in society was organized co-operatively, Hegel believed, wealthier subjects would be embedded in economic decision-making with others, replacing the detrimental “bond of victimization” between the rich and poor with a collective identity based on shared economic agency.</p>
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<img alt="A group of people, some holding constriction hats, standing around a whiteboard having a discussion" src="https://images.theconversation.com/files/502483/original/file-20221221-14-jdfiqa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/502483/original/file-20221221-14-jdfiqa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/502483/original/file-20221221-14-jdfiqa.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/502483/original/file-20221221-14-jdfiqa.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/502483/original/file-20221221-14-jdfiqa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/502483/original/file-20221221-14-jdfiqa.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/502483/original/file-20221221-14-jdfiqa.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Worker co-operatives could help us imagine a more just and human-centric economic future.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
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<p>When reimagining our current economic order, we can take a page out of Hegel’s handbook by focusing on <a href="https://www.mondragon-corporation.com/en/about-us/">worker co-operatives</a>: economic ventures that are <a href="https://institute.coop/what-worker-cooperative">co-owned by workers</a> that make productive decisions together, often — albeit not always — in a democratic manner.</p>
<p>Under what conditions are such co-operative modes of production successful? How can the state incentivize these forms of production within the existing market economy? And are these worker co-operatives really a way to achieve economic justice? These are the questions that, inspired by the past, might help us imagine a new, pluralist, more equal and human-centric economic future.</p><img src="https://counter.theconversation.com/content/195414/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>This article is an output of our project "Economic Pluralism: Past and Present" which received funding from SSHRC (Social Sciences and Humanities Research Council). </span></em></p><p class="fine-print"><em><span>.</span></em></p>Psychological and social perspectives on economy that were developed by 19th-century philosophers can help us re-imagine economics with a human face.Johannes Steizinger, Associate Professor of Philosophy, McMaster UniversityHelen McCabe, Assistant Professor in Political Theory, University of NottinghamThimo Heisenberg, Assistant Professor of Philosophy, Bryn Mawr CollegeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1957942023-01-03T11:54:57Z2023-01-03T11:54:57ZAusterity has its own life – here’s how it lives on in future generations<figure><img src="https://images.theconversation.com/files/501860/original/file-20221219-14-3mfq8r.jpg?ixlib=rb-1.1.0&rect=16%2C0%2C5447%2C3637&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Financial worries stemming from austerity could span generations.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/worried-aged-mother-embracing-comforting-grown-1463151290">fizkes / Shutterstock</a></span></figcaption></figure><p>Austerity in the UK is here to stay. The Bank of England has warned that the country is facing the longest recession since records began, predicting that the economic slump will <a href="https://www.bankofengland.co.uk/monetary-policy-report/2022/november-2022">extend well into 2024</a>. At the same time, the most recent budget has been called austerity 2.0 by <a href="https://www.deloitteacademy.co.uk/node/4317">companies</a>, <a href="https://www.unison.org.uk/news/general-secretary-blog/2022/11/blog-the-government-paves-the-way-for-austerity-2-0/">unions</a>, <a href="https://www.london.gov.uk/media-centre/mayors-press-release/Mayor-accuses-Government-of-ushering-in-%E2%80%98Austerity-2.0%E2%80%99">political figures</a> and <a href="https://wbg.org.uk/analysis/uk-budget-assessments/misguided-plans-for-austerity-2-0-wbg-response-to-autumn-statement-2022/">policy experts</a>. This suggests the era of public spending cuts seen since 2010 has reached the next phase: austerity as the “<a href="https://www.ituc-csi.org/austerity-the-new-normal">new normal</a>”.</p>
<p><a href="https://www.theguardian.com/society/2020/mar/03/lost-decade-hidden-story-how-austerity-broke-britain">Austerity policies</a> implemented since 2010 have not been substantially reversed or retracted in recent years. In fact, they have often been levelled at the most marginalised social groups. </p>
<p>In 2019, cuts in total expenditure on welfare and benefit payments alone were expected to total <a href="https://journals.lwbooks.co.uk/soundings/vol-2019-issue-71/abstract-7603/">£37 billion a year by 2020</a>. And now, growing numbers of people in the UK are struggling with everyday costs of living, while a further <a href="https://www.theguardian.com/uk-news/2022/nov/17/uk-government-spending-where-the-cuts-will-fall">£28 billion</a> of cuts to public funding were announced in the government’s November 2022 budget.</p>
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Read more:
<a href="https://theconversation.com/autumn-statement-is-highly-political-compared-to-research-on-best-ways-to-fix-public-finances-195035">Autumn statement is highly political compared to research on 'best' ways to fix public finances</a>
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<p>All of this shows how keenly economic policies are <a href="https://journals.sagepub.com/doi/abs/10.1177/0309132518796280">felt in everyday life</a>, in the mundane: eating, heating, caring, shopping and travelling. And perpetual and cumulative cuts like those we have seen made in recent years to welfare, education, social and healthcare services shape daily lives and social relationships. The effects continue, across time and generations. They also worsen existing <a href="https://www.intersecting-inequalities.com/">inequalities</a> relating to <a href="https://journals.sagepub.com/doi/full/10.1057/fr.2014.42">gender</a>, race, class, age and disability.</p>
<p>My <a href="https://academic.oup.com/joeg/article/16/2/305/2413171">previous research</a> during the 2008-09 UK economic recession revealed how memories and intergenerational relationships are key to understanding what it means to get by in times of recession and crisis. For instance, upbringing, living through previous recessions, debt and hardship are central to how people respond to economic downturns. These experiences, family histories and memories are often shared across generations in a way that influences younger people about financial issues.</p>
<p>Policies that aim to tackle poverty and economic inequality need to go beyond a focus on “the household” because this is not the only (or even the predominant) framework for how social relationships are built. Instead, people live within and across households that intersect based on kinship, friendship, intimacy and more. These are the main mechanisms that people use to <a href="https://policy.bristoluniversitypress.co.uk/growing-up-and-getting-by">get by during difficult times</a>.</p>
<p>Further research shows how austerity can be experienced as a “<a href="https://rgs-ibg.onlinelibrary.wiley.com/doi/abs/10.1111/tran.12300">personal crisis</a>”, affecting the things people can do, afford and dream about, including having security at home and work. It even extends to whether or not people are able to make decisions about <a href="https://journals.sagepub.com/doi/full/10.1177/00380261221135753">having children</a>. Suffice it to say, economic policies have more than momentary effects, they ripple across people’s lives – and that of their children – even if their circumstances improve.</p>
<h2>A life of its own</h2>
<p>Taking this further, <a href="https://www.isrf.org/2022/02/23/the-social-life-of-crisis/">my latest research</a> shows how austerity policies also have their own life. In the UK, this started with the early dismantling of the welfare state alongside diminished investment in deprived and post-industrial areas from the 1980s onwards. <a href="https://journals.sagepub.com/doi/pdf/10.1177/0308518X17701729">These programmes</a> have <a href="https://equalitytrust.org.uk/scale-economic-inequality-uk">entrenched inequality in certain regions</a> of the UK. So, while the current era of austerity arose from the recession following the global financial crisis 14 years ago, it is more deeply embedded in certain parts of the country.</p>
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Read more:
<a href="https://theconversation.com/three-charts-that-explain-why-falling-living-standards-could-deepen-the-uks-north-south-divide-196088">Three charts that explain why falling living standards could deepen the UK's north-south divide</a>
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<p>We can get an idea of <a href="https://www.isrf.org/2022/02/23/the-social-life-of-crisis/">how austerity affects people’s daily lives</a> by listening to their stories. Yusuf, for example, spoke to me about the instabilities he currently faces at work and how that has affected his life choices. “There’s no job security or stability,” he says. “There’s not enough trade [as a mechanic] anymore like there used to be years ago.” As a result, Yusuf does not think he could afford to have children.</p>
<p>Employment opportunities and local industries across northern England (where my research was carried out), had already been hit hard by years of <a href="https://journals.sagepub.com/doi/full/10.1177/00380261221135753">local underinvestment</a>. But adding austerity to the mix meant these factors culminated in multi-faceted forms of insecurity and uncertainty for Yusuf. His lack of job security is then linked to being unable to afford to have children – a <a href="https://www.tandfonline.com/doi/full/10.1080/01459740.2021.1951261">different life</a> to the one he had imagined.</p>
<p>Even if austerity cuts were reversed today, the long-term effects for Yusuf and countless others could continue for generations. Economic policies should be implemented alongside forecasts of what their effects will be for future generations. Researching these future outcomes, as well as past and current experiences, will highlight the unevenness of austerity measures. This will help to ensure that austerity policies and the devastation they cause do not become normalised, condemning many more generations to their long-term negative effects.</p><img src="https://counter.theconversation.com/content/195794/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sarah Marie Hall receives funding from UKRI and the Independent Social Research Foundation.</span></em></p>Public spending cuts and the soaring cost of living will not only affect people lives now, but could trickle down through generations.Sarah Marie Hall, Professor in Human Geography, University of ManchesterLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1963332022-12-20T13:38:15Z2022-12-20T13:38:15ZAmericans’ personal savings rate is near an all-time low – an economist explains what it means as a potential recession looms<figure><img src="https://images.theconversation.com/files/501599/original/file-20221216-16-p6e47a.jpg?ixlib=rb-1.1.0&rect=206%2C197%2C5784%2C3790&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Is Americans' low savings rate a problem?</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/midsection-of-woman-putting-coin-in-piggy-bank-on-royalty-free-image/1092378808?phrase=piggy%20bank">Maneerat/EyeEm via Getty Images</a></span></figcaption></figure><p><em>The rate at which Americans are saving money <a href="https://fred.stlouisfed.org/series/PSAVERT">has dipped close to an all-time low</a>, according to the Bureau of Economic Analysis. The personal savings rate was 2.3% as of October, down from 7.3% a year earlier. It’s the lowest since July 2005, when the rate hit a record low of 2.1%.</em></p>
<p><em>We asked <a href="https://scholar.google.com/citations?user=0ujPNgoAAAAJ&hl=en&oi=ao">Arabinda Basistha</a>, an economist at West Virginia University, to explain the personal savings rate, what’s driving it so low and what it means as a potential recession looms in 2023.</em></p>
<h2>What is the personal savings rate?</h2>
<p>The personal savings rate measures how much of Americans’ after-tax, or disposable, income is left over after spending on bills, food, debt and everything else. Calculated and reported by <a href="https://www.bea.gov/resources/learning-center/what-to-know-income-saving">the U.S. Bureau of Economic Analysis</a>, it is an important component of the financial security of American families. </p>
<p>The latest data shows Americans are saving just 2.3%, or US$2.30 of every $100 they earn after paying taxes, down from 7.5% as recently as December 2021. Historically, that’s very low.</p>
<p>From 2015 to 2019, for example, <a href="https://fred.stlouisfed.org/series/PSAVERT">this rate averaged around 7.6%</a>. It rose dramatically during the COVID-19 shutdown in early 2020, to a record high of 33.8%. With restaurants, entertainment venues and almost <a href="https://www.ajmc.com/view/a-timeline-of-covid19-developments-in-2020">everything else closed</a>, Americans had fewer things to spend money on.</p>
<p>That’s changed as economies have opened up and people eager to travel and dine out have begun to spend the money they had saved. </p>
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<h2>Will the savings rate decline continue?</h2>
<p>American consumers usually <a href="https://research.stlouisfed.org/publications/page1-econ/2014/11/01/smoothing-the-path-balancing-debt-income-and-saving-for-the-future/?&utm_source=fred.stlouisfed.org&utm_medium=referral&utm_term=related_resources&utm_content=&utm_campaign=pageone">do not change</a> their consumption and saving behavior dramatically. </p>
<p>So to understand this decline, it’s important to add some historical context.</p>
<p>The last time the savings rate fell this low, in 2005, it was part of a trend that lasted several years. From 1998 to 2004, rates averaged about 5.4%, slipping to 3.3% from 2005 to 2007. Thus the 2.1% rate recorded in July 2005 should be seen as part of a low-savings rate phase. </p>
<p>In recent years, Americans have been saving more of their disposable income. The savings rate averaged nearly 9% in 2019 just before the pandemic stifled spending. This led to the massive swing upward in savings.</p>
<p>An <a href="https://www.federalreserve.gov/econres/notes/feds-notes/excess-savings-during-the-covid-19-pandemic-20221021.html">October 2022 study</a> by the Federal Reserve found that U.S. households accumulated $2.3 trillion during the pandemic, thanks in part to about <a href="https://www.bloomberg.com/news/articles/2022-11-11/stimulus-checks-left-americans-flush-with-cash-making-fed-s-job-harder?sref=Hjm5biAW">$1.5 trillion in direct fiscal support</a>. </p>
<p>Rates swung again in the other direction, as consumer spending has surged and people use up those excess savings. Against this backdrop, I believe it is quite unlikely that the current low rates will continue for long, as consumers adjust back to pre-2020 patterns.</p>
<h2>What does the drop in savings signal about the state of Americans’ finances?</h2>
<p>While the savings rate is important, it doesn’t give us the full picture of Americans’ financial health. Moreover, one should not put too much importance on a single set of recent data, as future revisions <a href="https://fredblog.stlouisfed.org/2014/05/the-vanishing-negative-savings-rate/?utm_source=series_page&utm_medium=related_content&utm_term=related_resources&utm_campaign=fredblog">can be large</a>. </p>
<p>A few other measures are necessary to assess the state of household finances.</p>
<p>First, current delinquency rates – the share of all loans that are past due for at least 30 days – <a href="https://fred.stlouisfed.org/series/DRALACBN">are at just 1.2%</a>, the lowest since at least the 1980s. The <a href="https://fred.stlouisfed.org/series/DRCLACBS">rate is 1.9%</a> for consumer loans and <a href="https://fred.stlouisfed.org/series/DRCCLACBS">2.1% for credit cards</a>. Both rates have increased since 2021 but are still historically low.</p>
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<p>The low rates <a href="https://www.federalreserve.gov/econres/notes/feds-notes/why-is-the-default-rate-so-low-20210304.html">are partly due</a> to the <a href="https://libertystreeteconomics.newyorkfed.org/2020/11/following-borrowers-through-forbearance/">pandemic forbearance programs</a> and fiscal support, but still show Americans are in pretty good shape financially.</p>
<p>Another metric worth looking at is the household debt to gross domestic product ratio. This measures the debt burden of U.S. households relative to the size of the economy. The <a href="https://fred.stlouisfed.org/series/HDTGPDUSQ163N">latest data from June 2022 shows</a> the ratio at 76%, which is near the <a href="https://tradingeconomics.com/united-states/households-debt-to-gdp">lowest in about two decades</a>. Ahead of the 2007-2009 recession, the ratio was significantly higher, at about 100%. </p>
<p>A third measure of Americans’ financial health is the share of disposable income spent on payments for mortgages and other debts. U.S. households <a href="https://fred.stlouisfed.org/series/TDSP">spent about 9.6% of their incomes</a> servicing debts in the second quarter of 2022, well below the 12.8% average from 2005 to 2007. </p>
<h2>So if there’s a recession in 2023, does this mean Americans will be ready for it?</h2>
<p>Adding all this information together, household finances look quite stable and able to withstand moderate economic risks to the U.S. economy. </p>
<p>This is not to argue that a persistently low savings rate will not be an issue in the future. If the savings rate remains low for another year, it will weaken household financial positions.</p><img src="https://counter.theconversation.com/content/196333/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Arabinda Basistha does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Americans are saving just over $2 of every $100 in disposable income after setting aside historically high amounts of cash during the pandemic.Arabinda Basistha, Associate Professor of Economics, West Virginia UniversityLicensed as Creative Commons – attribution, no derivatives.