Why the Fed should go easy on the world economy in 2023

It is consumers who pay for the cost of the pandemic and the energy price spike. It is also consumers who drive economic growth
With the world economy headed for tough times and US mortgage rates hitting a high, the Fed shouldn’t inflict higher rates and greater pain

David Brown

Published: 10:00pm, 21 Nov, 2022

Why you can trust SCMP

Spare a thought for the mass of hard-pressed consumers struggling to contend with the pandemic, a global slowdown, the cost-of-living crisis and rising borrowing costs. It hardly sets the scene for sustainable recovery any time soon and the odds are that large parts of the global economy are heading for much tougher times and perhaps even recession in 2023.

At the end of the day, someone has to pay for the cost of the Covid-19 crisis and the energy price spike and the buck generally stops with consumers, in the form of higher taxes and spending squeezes, as governments seek to stay in control of public sector finances.

The problem is that central banks have lost patience with inflation and the cupboard is bare in terms of what governments can afford to spend on reflation.

With consumer spending accounting for the lion’s share of gross domestic product, it hardly bodes well for the coming months. Consumer confidence has already been deeply shaken by the pandemic and the war in Ukraine, but the cost-of-living squeeze on disposable incomes is leaving a deeper wound as households are forced to economise and cut back on spending.

There are worries about job security too as companies seek cost savings, adding extra pressure as unemployment levels start to creep higher. The Organisation for Economic Co-operation and Development reports that the unemployment rate in the OECD area was stable at 4.9 per cent for September, slightly above its low point of 4.8 per cent recorded in July 2022, but the odds are that the jobless rate will rise a lot more as global headwinds intensify and business confidence dives.

It’s no surprise to see consumer confidence levels showing signs of deep duress. For the 38 OECD member states, consumer optimism is close to an all-time low. It’s even weaker than the lowest points reached during the 2020 pandemic and after the 2008 crash.

Chances of quick recovery are slim, especially while the Ukraine war drags on and global monetary and fiscal policy continues to tighten.

The main worry for consumers is the rising cost of credit and the impact of higher mortgage borrowing costs on the housing market. Property values and financial perceptions could be hit very hard.

‘Finances are very tight’: how consumer confidence has tanked in China

Some countries will be more susceptible than others where consumers account for a larger share of aggregate GDP. In the United States, one of the world’s most consumer-driven economies, consumer spending accounts for up to 70 per cent of national output and can play a vital role in recovery expectations. With US mortgage rates hitting their highest level in nearly 20 years, there will be severe consequences for the economy as consumers are forced to cut back, especially with outgoings for fuel and energy going up at the same time.

The US economy dipped into technical recession in the first half of this year, with two successive quarters of negative GDP growth, but there may be worse to come in 2023 without some quick intervention.

01:32

Oil prices set to rise after Opec+ group agrees to larger-than-expected production cut

US policymakers can’t reverse the 2022 spike in energy prices or change the adverse geopolitical backdrop, but they can help soften the blow with relative changes to monetary and fiscal policy. They mustn’t make the mistake of doubling the pain for consumers with higher interest rates and tougher fiscal policy inflicted at the same time, as the United Kingdom is doing right now with likely dire consequences for future growth prospects.

Policymakers could follow China’s example of keeping monetary policy stable and accommodative and pushing through vital infrastructure investment initiatives to underpin economic confidence and keep growth momentum in a positive vein. Consumer demand may account for a smaller 60 per cent share of China’s GDP, so Beijing is right to spread the reflation load around other areas of the economy to fast-track recovery towards 5 per cent growth next year.

With the right policies in place, global policymakers can limit the severity of the downturn and the odds are the central banks will need to give way first. Consumers need a helping hand and the US Federal Reserve should lead the way with easier monetary policy next year to lend a hand to global recovery.

David Brown is the chief executive of New View Economics