Finance leaders are forecasting economic growth for this year despite decades-high inflation readings and the ongoing war in Ukraine.
During the American Bankers Association’s Washington Summit, Wells Fargo Chief Corporate Economist Richard DeKaser said the U.S. economy will likely grow by more than 2.5 percent this year as inflation drops and more people reenter the workforce. During a March 9 BankBeat webinar, KC Mathews, chief investment officer at the $42 billion, Kansas City, Mo.-based UMB Bank, predicted 3.6 percent GDP growth this year and a 7 to 10 percent increase in the S&P 500 market. He anticipates GDP growth will fall to 2.5 percent in 2023 as interest rates rise.
Inflation still poses challenges to the economy as a shortage of goods persists and demand remains high. Readings jumped last year from 1.4 percent in January 2021 to 7 percent in December, the highest in four decades. The inflation tax in 2021 was 3.5 percent on all personal income, subtracting 3 percent from the already robust 5.7 percent growth in GDP in 2021. To tame inflation, the Federal Reserve has already signaled it will end qualitative easing this month and raise interest rates by 0.25 percent before undertaking additional hikes later this year. U.S. government debt has soared to a record $30 trillion, a debt-to-GDP ratio of 123 percent, Mathews said. He expects that debt to hold down GDP growth as politicians seeking reelection hold off on hiking taxes and cutting public spending to trim the deficit.
Echoing the predictions of other economists, DeKaser said the current Russia-Ukraine war and subsequent sanctions will only worsen the existing supply chain issues and lead to further price spikes. Mathews blamed the relative inefficiency of U.S. ports as a key reason for the current supply chain woes. Regulations on the trucking industry also hamper the flow of consumer goods, he said.
Another economic challenge is the shortage of employees in a tight labor market: There are 11.2 million job openings, contrasting sharply with the fewer than 6.4 million unemployed Americans. Also, nearly 4 million people are voluntarily quitting their jobs every month, often for other positions offering better pay, benefits or flexibility. A wave of retirements early in the pandemic didn’t help, with 1 million to 2.5 million people aged 55 and older leaving the workforce, and the sharp drop in immigration during Covid-19 compounded the shortage, Mathews added. Increased automation or loosening regulations could help ease the situation, he said.
Despite supply chain and employee shortages, numerous positive economic indicators remain. U.S. GDP has already completely recovered from the Covid-19 recession, and unemployment has returned to 2019 levels. DeKaser expects unemployment, already historically low at 3.8 percent, to decline to 3.5 percent this year as workers who left the workforce over fears of the virus return to employment. He said the record $145 trillion in American household wealth as pandemic restrictions end will boost the economy and lead to GDP gains in the years ahead as demand remains high.