Written by Aditi Gupta
In recent times, there has been a lot of talk in global markets about the impending economic slowdown. Almost all major international organisations such as the IMF and the World Bank, have warned of considerable risks to the growth outlook. Much of the decline in the economic momentum can be attributed to a precipitous decline in activity in the world’s largest economies — the US, Europe and China. Even more interesting to note is that while there are some overarching global factors, each of these countries also has some unique set of factors contributing to the slowdown.
As per the IMF, the US economy is tipped to slow down to 1.6 per cent in 2022 from 5.7 per cent in 2021 and further to 1 per cent in 2023. In fact, the risks to growth have continued to increase. Global commodity prices remain elevated. This led to inflation skyrocketing across the world. Even in the US, inflation remained stubbornly high, contradicting the US Federal Reserve’s initial assessment of it being “transitory”. US consumer price index (CPI) based inflation has remained above the Fed’s mandated target of 2 per cent for 20-consecutive months. This has prompted it to embark on a long and perhaps the most aggressive policy tightening cycle since the late 1980s.
So far this year, the Fed has raised its policy rates by a cumulative 375 bps. The impact has been felt on overall economic activity with spending and, more importantly, housing demand being hit. This, however, is inevitable to keep price pressures in check. If recent data is any indication, we can say that the Fed may at last have some success in taming inflation. Both CPI and PPI (producer price index) inflation in the US have eased markedly in October, suggesting that the worst is probably behind us.
Monetary policy tightening goes hand-in-hand with a weakening of the growth momentum. Thus, faced with the growth-inflation dilemma, the Fed has found solace in the strength of the labour market conditions. While growth has faltered, the labour market has continued to remain strong which has given the Fed room to tighten rates further. Initial jobless claims for unemployment benefits have remained at near historic low levels, and the latest US jobs report showed solid payroll additions. However, there are signs of stress.
The unemployment rate has edged up marginally to 3.7 per cent in October 2022, from 3.5 per cent in September 2022. It still remains low when compared to the pre-pandemic levels. However, as rate hikes begin to impact the real economy, the labour market too will feel the heat. As per the Fed’s own projections released in September, the unemployment rate is expected to inch up to 4.4 per cent in 2023 and expected to remain there even in 2024. This is above the Fed’s long-term objective of a 4 per cent unemployment rate.
A number of big tech companies have announced massive layoffs citing a slowdown in business growth and revenues. Companies worldwide have been struggling to adjust to the fast-changing global landscape, faced with the twin shocks of the Covid-19 pandemic and the Russia-Ukraine war. This coupled with the synchronised global monetary policy tightening has led to higher costs, falling demand and a squeeze in profitability. To combat this, firms have begun to resort to layoffs. Reports suggest that Twitter has laid off about 50 per cent of its workforce after a change in its ownership. This was followed by tech giant Meta Platforms Inc. announcing plans to lay off about 11,000 employees. Other companies such as Microsoft, Salesforce, Oracle too have reportedly laid off employees amidst the worsening global macro landscape. There are reports that Amazon is planning to lay off 10,000 employees. More are likely to follow.
The Fed has been open to acknowledging the costs associated with its fight against inflation. In a statement at the Jackson Hole Symposium Fed Chairman Jerome Powell had said that lowering inflation will cause “some pain to households and businesses”. While a part of this is materialising, the road ahead is likely to be difficult. As companies adjust to the increasingly dim global macro landscape and attempt to recalibrate their business models accordingly, they will be required to make some hard choices. We may see more and more companies cutting down on fresh hiring or worse, more layoffs.
The writer is Economist, Bank of Baroda. Views are personal
