The bad news you probably already know. Mortgage costs are brutal at the moment, putting homeownership out of reach for millions of Americans. The pace of inflation is coming down but remains high, meaning consumer goods keep getting more expensive. Businesses are bracing for a recession. The economy is just weird right now, suffused with uncertainty and crossed with mixed signals.
Nevertheless, Americans have some positive short-term trends to celebrate, among them falling gas prices. Better still are three long-term trends that, despite their economy-transforming magnitude, have gone largely uncelebrated or even unnoticed. These trends promise a more dynamic economy not only in 2023 but also in the coming decades:
Inequality is easing
A decade ago, President Barack Obama called economic inequality “the defining challenge of our time,” arguing that “the next few years will determine whether or not our children will grow up in an America where opportunity is real.” At the time, data showed the middle class shrinking, average wages stagnating, and the wealthy eating up all the gains from economic growth. Rising inequality was paralyzing Washington and fraying the country’s politics. Yet around the time of Obama’s speech, inequality stopped rising. In the past three years, the country has become more equal, at least by some measures.
I don’t want to overstate things: Income and wealth are still distributed very unequally in the United States, much as they were in the Gilded Age. The haves are still trouncing the have-nots. The country’s level of inequality remains a threat to its political stability and long-term growth trajectory. Still, wage growth of late has been fastest for the poorest workers, David Autor of MIT and Arindrajit Dube and Annie McGrew of the University of Massachusetts at Amherst recently found—so much so that, the pandemic notwithstanding, the past few years have erased one-third of the growth in the wage gap between the highest- and lowest-paid workers over the past four decades.
The country’s wealth inequality has eased a little too, although the explanation isn’t entirely salutary. The value of assets held by the top 0.1 percent of the wealth distribution has dropped from $18.4 trillion to $16.9 trillion in the past three quarters; the holdings of the top 10 percent have fallen from $98.6 trillion to $92 trillion. (The bottom 50 percent, by the way, accounts for less than $5 trillion.) Rich people still own the bulk of the assets; those assets are just trading for less, thanks to the downturn in the stock market and in high-end real estate. A more encouraging sign in 2023 would be if wealth inequality declines because more middle-class and low-income families also get to own homes, stocks, and businesses.
We bent the cost curve in health care
Fourteen years ago, analysts at the Centers for Medicare and Medicaid Services thought that health spending would be roughly 22 percent of GDP in 2022. The real share was 18.3 percent. Government actuaries spent years overestimating the number of dollars Americans would spend in hospitals and doctor’s offices—a decade-plus ago, they thought we would be spending about $700 billion more on an annual basis than we are today—and the share of the economy devoted to health care. That is because the “cost curve” bent.
Nothing scared the green-eyeshade set like the cost curve projected in the aughts—a swoop showing Medicare spending, national health expenditures, or both growing faster than the economy itself did. Their projections, and thus their worries, were rooted in reality: The country’s health expenditures were swelling by tens of billions of dollars a year, and the country’s population was aging, meaning demand for health care would go up.
But for the past 15 years, health-care spending growth has been subdued, leaving aside the catastrophic early years of the pandemic. As a result, CMS anticipates that health spending as a share of GDP should be stable over the next decade at roughly 20 percent. And the CBO sees Medicare spending rising from 5.8 percent of GDP to just 6.8 percent of GDP 10 years from now—a reasonable amount, given the rising share of older Americans.
What happened? Any number of things. The Great Recession and slow recovery that followed dampened health spending for years. More employers started offering and more people signed up for high-deductible health plans, which come with significant out-of-pocket costs and discourage people from seeking care. The Affordable Care Act implemented a series of cost controls in Medicare. And pharmaceutical companies have conjured up fewer new, expensive drugs.
Of course, the country still spends an extraordinary amount on health care while having significantly lower life expectancies and worse health outcomes than its peers. And families are still struggling with crushing out-of-pocket costs. But in the long term, the bending of the cost curve promises higher wages for families and more room in the federal budget for other priorities.
We bounced back after the COVID recession
It took 76 months for the economy to recover every single job it shed in the Great Recession. It took 30 months for it to recover every job it lost during the pandemic. And in this most recent recession, the labor market gained back the majority of jobs it lost in less than a year—far faster than after the housing crash.
This is an extraordinary policy triumph. An unprecedented downturn hit, and the government—with loose monetary policy and trillions of dollars of stimulus spending—buoyed millions of families through it, unlike during the Great Recession. The economy has not lost any potential output due to the COVID recession, economists think. Long-term unemployment has barely grown. The government’s income supports made low-income families more than whole: Earnings among the poorest workers actually increased by 66 percent in 2020 because of boosted unemployment-insurance payments and stimulus checks; during each of the prior two recessions, the same group of Americans lost a quarter of its earnings.
Prior recessions left grievous scars. Many laid-off workers experienced worse health and permanently lower earnings trajectories; in some cases, their children’s educational and employment prospects were diminished too. Economists are now hopeful that the COVID downturn might not cause such permanent damage.
Each of these overlooked but hugely consequential trends means a more vibrant, productive economy today and in the future. The COVID stimulus program saved jobs, lives, and livelihoods while protecting the economy’s productive capacity. The moderation in inequality means less food insecurity and healthier kids growing up in low-income households. The bending of the cost curve frees up money for wage increases and gives the government space in the budget for investments in child care, social insurance, infrastructure, and everything else.
Yet each feels like just a beginning. An efficient and effective health system, the end of poverty, and lower inequality—these are things worth fighting for in the new year.
UK to Be the Only G-7 Economy in Recession This Year, IMF Says – BNN Bloomberg
(Bloomberg) — Britain faces the bleakest two years of any major industrial nation with a recession in 2023 and the slowest growth of peers in 2024, the International Monetary Fund predicts.
The UK will be the only Group of Seven member whose economy will shrink this year, with a contraction of 0.6%, the IMF said. The Washington-based institution downgraded its outlook by a massive 0.9 percentage point from October, saying higher interest rates and taxes along with government spending restraint will exacerbate a cost-of-living crisis.
The forecast highlights the challenges Prime Minister Rishi Sunak’s government faces in the leadup to the next election. Chancellor of the Exchequer Jeremy Hunt suggested the economy is likely to perform better than the IMF expects.
“The governor of the Bank of England recently said that any UK recession this year is likely to be shallower than previously predicted,” Hunt said in a statement. “We are not immune to the pressures hitting nearly all advanced economies. Short-term challenges should not obscure our long-term prospects.”
In 2024, the economy will rebound only slowly, growing at 0.9% — matching Japan and Italy at the bottom of the G-7 league table for growth.
The forecast anticipates the first UK recession, excluding the pandemic, since the financial crisis in 2009. Across the two years leading up to the deadline for Prime Minister Rishi Sunak to call an election, the economy will effectively stagnate — expanding just 0.3%.
The IMF did not downgrade any other G-7 economy this year as it raised its global growth forecast from 2.7% to a still sluggish 2.9%. An escalation of the war in Ukraine or a health crisis in China as Covid spreads could set back the world economy, it said in its World Economic Outlook update. However, “adverse risks have moderated since October.”
The downgrade to UK growth is striking because the IMF’s October forecast was prepared before the £45 billion ($55.7 billion) unfunded tax giveaway in the September budget during the short-lived Liz Truss premiership. At the time, the fund said the fiscal splurge would have boosted growth.
Since then financial conditions have tightened, rising borrowing costs for businesses and households. The Bank of England has raised rates from 2.25% to 3.5%, and markets now expect rates to settle around 4.5%. The IMF said it’s downgrade also reflected “tighter fiscal” policy but, according to Treasury figures, fiscal policy is looser this year than at the last forecast.
In October, the IMF attacked the UK’s massive spending spree — arguing that fiscal and monetary policy should not be working at cross purposes and that the government needed to bring the public finances under control.
IMF Chief Economist Pierre-Olivier Gourinchas repeated the warning. In a blog post alongside the forecast, he said many countries are being too generous with their energy support, which is “costly and increasingly unsustainable.”
Instead, countries should “adopt targeted measures that conserve fiscal space, allow high energy prices to reduce demand for energy, and avoid overly stimulating the economy,” Gourinchas said.
He also urged central banks, like the Bank of England, to press on with rate rises even if it means inflicting more misery on cash-strapped households. The BOE is expected to raise rates a half point to 4% on Thursday.
“Where inflation pressures remain too elevated, central banks need to raise real policy rates above the neutral rate and keep them there until underlying inflation is on a decisive declining path,” Gourinchas said. “Easing too early risks undoing all the gains achieved so far.”
- UK Wage Inflation Points to Another Big Rate Hike This Week
–With assistance from Andrew Atkinson.
©2023 Bloomberg L.P.
In Egypt, economic heat of Russia's war in Ukraine is only getting worse – Al-Monitor
GIZA — With every passing day, the money in Hanan Hussein’s purse becomes more and more dwarfed by the items in this crowded vegetable market in Embaba — a densely populated neighborhood in the Giza province of Greater Cairo.
Hussein, a mother of two in her early 50s, looks at the price tags of food items placed on the carts or on the wooden tables jockeying for limited space on both sides of the market and shrugs her head, knowing that the few pounds she has can only buy a few of the items on display.
“Tomatoes selling for 10 pounds a kilo, potatoes for 12, zucchini for 15 and rice for 19,” she says to herself.
“What are these prices?” she asks herself as she moves toward the end of the market.
Hussein passes by the shops selling fish, meat and chicken but pays no attention to them.
When she reaches the end of the market, she turns back and starts a new journey through the vegetables and fruit on display, hoping to come across something she can buy.
“We can’t afford these high prices,” Hussein told Al-Monitor, pointing at the vegetables in front of her. “I am looking at all the items on my shopping list, but it looks like I can’t buy any.”
Tens of millions of Egyptians, especially the poor and the middle class, are affected by the economic repercussions of Russia’s war on Ukraine.
Al-Monitor/Premise poll released this month found 68% majority of the population in Egypt, Turkey, Yemen, Tunisia and Iraq worried about their ability to access food in the coming months.
Having initially deprived the Egyptian tourism sector of billions of dollars in revenues, with Russians and Ukrainians constituting a third of annual tourist arrivals, the war has caused food import-dependent Egypt to pay more for its imports, especially cereals such as wheat and maize, according to the World Economic Forum.
Disruptions caused by the war on the international supply chain are also translating into a higher price for industrial and agricultural production requirements in a country where dependence on imported production essentials is very high.
Egyptians are feeling the pinch, with price increases in shops and markets across the country.
Hussein has stopped buying fish, chicken, meat and table condiments, among other items.
So has Alaa Mamdouh, a civil servant in his mid-30s who has one child.
Like many Egyptians, Mamdouh has decided to take on a side job to supplement his income. However, with less than 4,000 Egyptian pounds (less than $133) from both jobs, he can’t manage.
“I don’t know what to do,” Mamdouh told Al-Monitor. “People like me can’t keep going with food prices assuming new heights every day.”
Other Egyptians are complaining about their income being dwarfed by growing commodity prices.
Deep beneath their suffering is an inflation rate that is hitting an all-time high, threatening a political and security backlash.
Fears from this backlash have prompted Egyptian President Abdel Fattah al-Sisi to assure the public that things are going to be alright.
“I know that some people are worried, and they have reasons to be concerned,” the Egyptian leader said Jan. 6 after entering a large church in the New Administrative Capital, a new megacity he is constructing in the desert, to congratulate his country’s Coptic Christians on Christmas. “But you have to be sure that God will not fail us,” he added.
Two days later, he asked Egyptians not to buy into the uninformed rhetoric of those who spread fear about national economic conditions.
“We did not enter wars or squander the wealth of our country,” Sisi said. “Egypt did not cause these conditions.”
As he spoke, the Egyptian pound continued to lose its value to the US dollar, the main import currency in this country — at the time of writing selling at 30 pounds per dollar.
Egypt has had to depreciate its national currency two times since February 2022, says Al-Arabiya News.
It scrapped its managed exchange rate regime a few days ago in light of an agreement with the International Monetary Fund and as part of other measures that will also include the elimination of energy subsidies and the withdrawal of the state from economic activities.
A cheaper pound weakens the purchasing power of people like Hussein and Mamdouh and stagnates the business of people like fishmonger Ahmed Hamdi, who sat outside his shop in the same market in Embaba where fish prices filled passersby with aversion.
“People come here only to ask about prices, but nobody buys anything,” he tells Al-Monitor.
Some fellow traders closed down their shops due to sales spiraling downward and losses spiraling upward, he says. “I may do the same if things get worse.”
To reduce the intensity of the downturn, the government has opened dozens of outlets where food is sold at a discount. It also increased food subsidies for tens of millions of people registered in the national food rationing system, according to Daily News Egypt.
Economists say, however, that these efforts will not pay off without proper market control.
“Traders use current conditions to amass huge wealth by increasing monopolies and raising prices,” director of think tank Capital Centre for Economic Studies Khaled al-Shafie told Al-Monitor. “This requires strong supervision over the market.”
The lack of this supervision caused a traditionally reticent parliament to grill the minister of supply a few days ago.
Parliament members criticized the minister for his failure to control runaway commodity prices.
“The minister does nothing to prevent traders from exploiting the poor,” parliament member Nafie Abdelhadi told Al-Monitor. “Commodity prices are rising dramatically, but the minister is only watching.”
This leaves people like Hussein in limbo. Every day, she faces the riddle of matching the little money in her purse with the needs of her family.
“It is a new, difficult test every day, but I am sure God won’t forget us,” she says.
Power Crisis Triggers Water Cuts in South Africa’s Economic Hub – BNN Bloomberg
(Bloomberg) — Parts of Johannesburg, South Africa’s economic hub, are being subjected to renewed water-supply cuts as ongoing electricity shortages disrupt pumping operations.
A power failure at Rand Water’s Eikenhof pump station, which supplies reservoirs in several high-lying areas of Johannesburg, resulted in critically low levels of supply, the municipality said on Twitter on Monday. While repairs have been completed, it warned that time is needed to replenish the storage system. Alternative sources of water have been arranged for hospitals.
State-owned utility Eskom Holdings SOC Ltd., which provides 90% of all of South Africa’s electricity, is unable to meet demand for power from its mostly old and poorly maintained plants, and has instituted rolling blackouts to keep the national grid from collapsing. There were record outages last year and they show no signs of abating.
The power rationing that can last for hours at a stretch is taking an ever-increasing toll on the economy and disrupting manufacturing, mining and farming. Cape Town, the country’s main tourist hub, partially shut several beaches during the height of the holiday season late last year after wastewater pumps broke down.
Read more: Why Blackouts Are Still Crippling South Africa: QuickTake
Municipalities must ensure sanitation infrastructure, sewer-pump stations and generators are maintained and continue operating to ensure there aren’t sewage spills, according to the Department of Water and Sanitation. It confirmed that the power cuts were, however, reducing the reliability of water supply to consumers, with the effects varying between different areas depending on the capacity of their back-up generators.
“The stop and start process at the water-treatment works negatively impact on water quality,” the department said in an emailed reply to questions. “The power cuts also negatively affect the treatment process at the waste-water treatment works, resulting in poorly processed discharge from the treatment plant. The storage capacity at the sewer pump stations were not designed for long durations without pumping. That also increases the risk for possible spillages.”
Crime and vandalism has also impacted negatively on Johannesburg’s water supply: thousands of water meters, manhole covers and hundreds of water tanks were stolen over the past year, according to the municipality.
©2023 Bloomberg L.P.
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