In financial terms the past year has been bad for almost everyone. Inflation of 10% year-on-year across the rich world has slashed household incomes. Investors have lost out as global stockmarkets have plunged by 20%. Yet this poor aggregate performance hides wide differences: some countries have done pretty well.
To assess these differences, The Economist has compiled data on five economic and financial indicators—gdp, inflation, inflation breadth, stockmarket performance and government debt—for 34 mostly rich countries. We have ranked each economy according to how well it has done on these measures, and created an overall score. The table overleaf shows the rankings. It includes some unexpected results.
For the first time in a while, the economic party is happening in the Mediterranean. Top of our list is Greece. Other countries that plumbed the economic depths in the early 2010s, including Portugal and Spain, also score highly. They are not the only pleasant surprises. Despite political chaos, Israel did well. Meanwhile, despite political stability, Germany is an underperformer. Two Baltic countries, Estonia and Latvia, which won plaudits in the 2010s for speedy reforms, come bottom.
gdp, usually the best measure of economic health, is our first indicator. Norway (helped by high oil prices) and Turkey (by a boom in sanctions-busting trade with Russia) have done better than most. The fallout from covid-19 also looms large. Thanks to strict lockdowns and a collapse in tourism, a year ago much of southern Europe was in dire straits, so the region was due a decent year. Visits to the Balearics recently rebounded beyond their pre-pandemic level. As your correspondent discovered on a recent trip to Ibiza, the island is so busy it is difficult to book a taxi or find a spot at a half-decent restaurant.
Ireland probably had a strong year, though one not nearly as strong as gdp numbers suggest. The activities of big multinational companies, many registered there for tax purposes, have for years distorted the figures. By contrast, America’s gdp numbers are misleadingly weak: in recent quarters official statisticians have struggled to account for the impact of enormous stimulus packages.
More granular data fill in the picture. Our second measure is the change in the price level since the end of 2021. Away from the world’s attention, some countries have seen low inflation. In Switzerland consumer prices have risen by just 3%. The country’s central bank, helped along by a strong currency, responded rapidly to the rise in prices earlier this year. Countries which have non-Russian energy sources—such as Spain, which gets much of its gas from Algeria—have also done better than average. Those reliant on Vladimir Putin for fuel have truly suffered. In Latvia average consumer prices have risen by a fifth.
Our third measure also relates to inflation. It calculates the share of items in each country’s inflation basket where prices have risen by more than 2% in the past year. This provides an indication of how entrenched inflation is—and therefore hints at how quickly inflation will fall over the coming year. Some countries that suffer from high headline inflation have nonetheless been able to limit its breadth. In Italy, for instance, average consumer prices have risen by 11% this year, yet “only” two-thirds of its inflation basket has above-target inflation. Japanese inflation also looks like it may fade away. Britain is in more trouble. The price of every category in its basket is rising fast.
People’s sense of economic well-being does not just come from prices in the shops. They also look at the value of their pension pots and stock portfolios. In some countries it has been a terrible year for these sorts of investments. Share prices in both Germany and South Korea are down by nearly a fifth in 2022, double America’s decline. Swedish stocks have done even worse. Yet there are a few spots of strength. Norway’s stockmarket is up on the year. So is Britain’s, which is populated by the sort of dull, plodding companies that tend to be rewarded when economic times are tough. A fall in the value of the pound has also increased the value of foreign sales.
Our final measure concerns the change in net government debt as a share of gdp. In the short run ministers are able to paper over economic cracks by increasing spending or cutting taxes. However this can create more debt and thus the need to turn the fiscal screws in the future. Some governments have spent extravagantly to cope with the cost-of-living squeeze. Germany has allocated funds worth about 7% of gdp to help with sky-high energy costs, meaning its debt-to-gdp ratio has risen. Other countries have pulled back from the splurge, helping to right the fiscal ship. Assisted by high inflation, public debt in southern European countries seems to be on the way down.
Will the gap between 2022’s winners and losers persist in 2023? Before long southern Europe’s economic growth, weighed down by rapidly ageing populations and high debts, will surely fall back to the region’s usual less-than-stellar levels. And there are hopeful signs that in countries such as America and Britain high inflation may finally be easing, which would help them up the rankings.
Along other dimensions, differences are likely to persist, not least when it comes to those countries reliant on Mr Putin for their energy supplies. Against the odds, many managed to replenish their stores of natural gas before winter set in—but only by paying outrageous prices. With supplies now largely cut off, the coming year will be a lot more difficult. That will be a big concern in the Baltics, but less so on the other side of Europe. It is hard to worry about gas supplies while eating a giant plate of squid on an Ibicencan beach. ■
US inflation and consumer spending cooled in December – Al Jazeera English
The Federal Reserve’s preferred inflation gauge eased further in December, and consumer spending fell – the latest evidence that the Fed’s series of interest rate rises are slowing the economy.
Friday’s report from the US Department of Commerce showed that prices rose 5 percent last month from a year earlier, down from a 5.5 percent year-over-year increase in November. It was the third straight drop.
Consumer spending fell 0.2 percent from November to December and was revised lower to show a drop of 0.1 percent from October to November. Last year’s holiday sales were sluggish for many retailers, and the overall spending figures for the final two months of 2022 were the weakest in two years.
The pullback in consumer spending will likely be welcomed by Fed officials, who are seeking to cool the economy by making lending increasingly expensive. A slower pace of spending could boost their confidence that inflation is steadily easing. Still, the decline in year-over-year inflation matched the Fed’s outlook and is not likely to alter expectations that it will raise its key rate by a quarter-point next week.
On a monthly basis, inflation ticked up just 0.1 percent from November to December for a second straight month. Energy prices plunged 5.1 percent, and the overall cost of goods also fell.
“Core” prices, which exclude volatile food and energy costs, rose 0.3 percent from November to December and 4.4 percent from a year earlier. The year-over-year figure was down from 4.7 percent in November, though still well above the Fed’s 2 percent target.
Falling prices for oil, gas, copper, lumber, wheat and other commodities, along with the unclogging of supply chains, have helped slow the retail costs of cars, furniture and clothes, among other items.
Price increases, though, have remained persistently high for some goods and services, including eggs, which skyrocketed 60 percent last month compared with a year ago. Egg prices rose 11.1 percent just in December, inflated by an outbreak of avian flu that has led to a culling of herds and higher feed costs.
Car rental prices have also soared nearly 27 percent from a year ago and rose 1.6 percent just in December.
But for many other items, inflation is easing. Coffee prices, though up nearly 14 percent in the past year, rose just 0.2 percent last month. And the cost of clothes and shoes rose just 3 percent in the past year and 0.3 percent last month.
Friday’s figures are separate from the better-known inflation data that comes from the consumer price index. The CPI, which was released earlier this month, has also shown a steady deceleration.
“The latest data offer the first tangible signs that the economy’s main engine is slowing,” said Oren Klachkin, lead US economist at Oxford Economics, referring to consumers, whose spending accounts for about 70 percent of economic activity.
The Fed has been seeking to slow spending, growth and the surging prices that have bedevilled the nation for nearly two years. Its key rate, which affects many consumer and business loans, is now in a range of 4.25 percent to 4.5 percent, up from near zero last March. Though inflation has been decelerating, most economists said they think the Fed’s harsh medicine will tip the economy into a recession sometime this year.
“We continue to see the US economy experiencing a mild recession this year,” said Lydia Boussour, senior economist at EY Parthenon.
Low levels of unemployment
A recession typically causes widespread layoffs and higher unemployment. But for now, US employers are adding workers, and the unemployment rate remains at a half-century low of 3.5 percent.
Should job losses, which are occurring at many finance and tech companies, drive up unemployment, a recession could eventually be declared by a group of economists at the National Bureau of Economic Research, a nonprofit that officially determines when recessions occur. The economists at the NBER typically make such an announcement well after a recession has actually begun.
For now, the number of people seeking unemployment benefits – a proxy for layoffs – declined last week to 186,000, a very low level historically. And Walmart, the nation’s largest employer, said it would raise its minimum wage, from $12 to $14 an hour, to help it keep and attract workers.
The Fed is in an increasingly delicate position. Chairman Jerome Powell has emphasised that the central bank planned to keep boosting its key rate and to keep it elevated, potentially until the end of the year. Yet that policy may become untenable if a sharp recession takes hold.
On Thursday, the government reported that the economy grew at a healthy clip in the final three months of last year but with much of the expansion driven by one-time factors: Companies restocked their depleted inventories as supply chain snarls unravelled, and the nation’s trade deficit shrank.
By contrast, consumer spending in the October-December quarter as a whole weakened from the previous quarter, and business investment dropped off sharply. Overall, the economy expanded at a 2.9 percent annual rate in the October-December quarter, down slightly from a 3.2 percent pace in the previous quarter.
If consumers remain less willing to boost their spending, companies’ profit margins will shrink, and many may cut expenses. That trend could lead eventually to waves of layoffs. Economists at Bank of America have forecast that the economy will grow slightly in the first three months of this year – but then shrink in the following three quarters.
More frugal consumers would threaten to send the economy into a recession. But they can also help reduce inflation. Companies cannot keep raising prices if Americans will not pay the higher prices.
Last week, the Federal Reserve’s beige book, a gathering of anecdotal reports from businesses around the country, said, “Many retailers noted increased difficulty in passing through cost increases, suggesting greater price sensitivity on the part of consumers.”
Your Weekend Reading: Nobody Knows Where the US Economy Will Land – Bloomberg
The US Economy Slows Down
The Federal Reserve must be pleased with the top-line numbers in Thursday’s fourth-quarter GDP report, which showed the U.S. economy grew by a solid 2.9% while its preferred price index slowed to 3.2%. But drill down, and the economy looks to be losing momentum.
Maybe the best news from the report is that consumer spending continued to increase at a steady 2.1% and contributed about half of the GDP growth. It appears that rising interest rates haven’t yet caused consumers to pull back, though the December retail sales report showed a sharp drop in spending and could augur a slowdown.
The shift in spending toward services that began as lockdowns eased continued. Services contributed 1.16% to the consumption increase, with motor vehicle and parts chipping in 0.20%. End-of-year discounts may have moved forward purchases, and auto analysts are forecasting weak growth this year.
Businesses also restocked inventories as supply chains eased, which accounted for 1.46% of the GDP growth. Net exports also added 0.56%. But neither is likely to be sustained going forward. The other big lift to GDP came from government spending, which increased 3.7% and contributed 0.64%. Most of this was transfer payments and salaries rather than defense or public works.
The biggest cause for concern was the 6.7% fall in fixed private investment. Much of that was housing (-26.7%), owing to the sharp increase in interest rates. What the Fed giveth, it now taketh away. Capital expenditures also fell 3.7%, which signals that businesses are getting nervous and spending less on equipment that can boost worker productivity.
Intellectual property investment is holding up better, but research and development declined last quarter. One culprit may be last year’s expiration of the immediate expensing for R&D. The pullback in business investment amid higher interest rates and economic uncertainty has been evident in the ISM purchasing managers index for some time.
The economy can’t live on consumption alone, and the sharp decline in the savings rate—2.9% in the fourth quarter compared to 7.3% a year earlier—suggests that consumers may be running up credit cards to make ends meet or take the vacation they couldn’t during the pandemic. But as savings decline, so may consumer spending.
Perhaps the best news for the Fed is that real disposable personal income grew 3.3% as the personal consumption expenditure price index eased to 3.2%, down from 4.3% in the third quarter and 7.5% in the first. This suggests that its monetary medicine may be starting to work, and it might not have to raise interest rates as high as some expected a few months ago.
Recent job and unemployment claim reports also indicate that the labor market is holding up well, even as many large companies announce layoffs. Small businesses are still hiring, and China’s abandonment of zero-Covid policies will help global growth.
The biggest risks to the U.S. economy other than higher interest rates this year are probably the tax increases in the Inflation Reduction Act and a regulatory onslaught that are compounding business uncertainty. President Biden has a growing economy, and let’s hope he can keep it.
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