February 10, 2023 | OPINION | By Zoraiz Zafar
For the last 18 months, we have been blasted with waves of mainstream media sensationalism suggesting that the impending economic collapse would be parallel only to the Financial Crisis of 2007-08. There were reports of major investment banks collapsing, entire countries defaulting, and unemployment in industrialized countries breaching the idealized 5% threshold. Yet, months after these claims were made, no such economic meltdown has been seen, especially regarding the U.S. economy.
In the last few weeks, the U.S. Bureau of Economic Analysis published multiple reports suggesting that most key macroeconomic indicators are in good health. For instance, the 2022 fourth quarter US GDP report showed an annual growth rate of 2.9%.
Furthermore, the jobs report published just last week beat expectations by a whopping three-fold margin. It shows that the economy added 517,000 jobs in January 2023 and that the unemployment rate dropped to the lowest it has been in several decades at 3.4%.
Lastly and most importantly, inflation, which has been public enemy number one for the past year, has shown strong signs of finally subsiding. The latest Consumer Price Index (CPI) report shows a year-on-year inflation rate of 6.5%, after reaching a disturbingly high rate of 9.1% over the summer of 2021.
But where does the economy go from here, you ask? Well, it can be reasonably predicted that, given the Federal Reserve’s interest rate hikes to curb inflation, the economy will see somewhat of a slowdown in 2023. The labor market, which has been overheating for the last two years, may finally get some respite and unemployment could go back to its natural level of ~4.0%. Inflation, on the other hand, should continue to move in the right direction and could possibly come down to the Federal Reserve’s target level of 2% by the beginning of next year.
A recession is no longer inevitable and, even if it does happen, it would be milder than the Great Recession of 2008-09.
So, is every economy in good shape right now? Most certainly not. Many developing countries with flawed fiscal policies and poor external lending habits, such as Pakistan and Sri Lanka, are in severe economic distress. The strengthening of the U.S. dollar due to increasing interest rates has left these over-leveraged economies on the verge of a sovereign default as their debt becomes more expensive in terms of their own weakening currencies.
Moreover, many European countries, such as Hungary and the Baltic states, have had to contend with much higher levels of inflation due to their lack of energy independence. In the wake of the Russian invasion of Ukraine, these countries have seen energy prices soar and are yet to implement a concrete response plan to offset this economic shock. Both these situations represent macroeconomic mismanagement at the local level, not a gloomy global economic outlook.
Steps taken by key economic agents in the U.S. and a handful of other industrialized countries have helped ensure that the short-term outlook remains relatively stable, with a few potholes left to dodge. Now, I am no die-hard fan of the Biden administration, but the next time a right-wing hack or a Bernie Sanders fanatic tells you that Bidenomics is failing, show them this article and, maybe, we can play a small part in reducing polarization in this country.