Omicron and inflation weigh on US growth outlook

The outlook for economic growth in the first quarter and into 2022 darkens amid the latest wave of Covid-19, as consumers grapple with high inflation and businesses juggle labor disruptions work and production.

Forecasters polled by The Wall Street Journal this month cut their first-quarter growth expectations by more than a full percentage point, to an annual rate of 3% from their forecast of 4.2% in the October survey.

The combination of higher inflation, supply chain constraints and the fast-spreading Omicron variant has led economists to cut their growth forecast to 3.3% for the current year as a whole, based on the change in inflation-adjusted gross domestic product in the fourth quarter of 2022 compared to the previous year, compared to 3.6% in October. Last year, production increased by 5.2%, economists estimate.

The economy faces a tricky balancing act this winter, economists say, as the rapid spread of the Omicron variant threatens to curb consumer spending and exacerbate labor shortages and poverty. supply chain as workers call in sick.

Meanwhile, the Federal Reserve is under pressure from businesses and consumers to rein in inflation, which recently hit its fastest pace in nearly four decades.

“The economy is at a major turning point in terms of whether inflationary expectations are starting to embed themselves in the minds of businesses, consumers and workers,” said Lynn Reaser, former chief economist at Bank of America Corp. and now at Point Loma. Nazarene University.

The current pandemic-related labor shortage is expected to keep wages rising steadily over the coming months as employers offer higher wages to retain and hire staff. Economists expect average hourly earnings to be up 4.9% year-on-year in June; they increased by 4.7% in December.

By the end of 2022, wage inflation is expected to ease slightly to a 4.5% year-over-year increase in average hourly earnings. Still, economists expect workers to reap annual wage increases of around 4% for most of the next two years.

Soaring inflation could force the central bank to aggressively raise short-term interest rates, risking a recession. The Fed cut rates to near zero and began buying bonds to lower long-term rates in 2020 as the coronavirus pandemic hit the US economy, triggering financial market volatility and a deep, short recession .

With the labor market enjoying a robust recovery, economists say the central bank now risks not raising interest rates fast enough to keep up with rapidly rising prices. Inflation, largely at rest since the 2007-2009 recession, has accelerated sharply since last spring, as rising demand came up against bottlenecks linked to Covid-19.

The Labor Department reported Wednesday that consumer prices rose 7% in December from the same month a year earlier, compared with 6.8% in November. It was the fastest since 1982 and the third month in a row it was over 6%.

“This is the first time the Fed has chased inflation in decades,” said Diane Swonk, chief economist at Grant Thornton. “The biggest risk is that the Fed could panic and overshoot” by raising rates faster than the current level of inflation warrants. , she said.

On average, respondents expect annual inflation to moderate to 5% in June, up sharply from the 3.4% they expected in October, as measured by the the consumption. They expect it to cool further to 3.1% at the end of this year, up from last quarter’s forecast of 2.6%.

Higher inflation and low unemployment mean economists expect the Fed to start raising borrowing costs soon. Nearly two-thirds expect the Fed to raise rates at its March 15-16 policy meeting and continue to raise them throughout the year. More than half of forecasters expect three rate hikes this year, while almost a third expect more than three.

This is a dramatic shift from the last survey in October, when just 5% of respondents expected a rate increase in March and more than 40% expected no rate increase in March. 2022.

In addition to rising prices, consumers, whose spending accounts for 69% of GDP, are facing continued uncertainty over the Covid-19 pandemic and the end of government supports like the monthly child tax credit that offered a financial cushion to millions of households.

Concerns over limited supply remain a cloud over the outlook, forecasters said. The bottlenecks are expected to continue in part due to China’s zero-tolerance strategy to fight the pandemic, which has led to disruptions at ports and factories.

“Freight rates remain extremely high, port backlogs are significant, the zero covid policy in Asia is a major constraint while restocking in the US will add to tensions, meaning demand could continue to exceed the supply available for a long time to come,” said James Knightley. , Chief International Economist at ING.

More than half of economists expect supply chain disruptions to persist at least until the second half of this year, with a third expecting them to continue until 2023 or longer late.

The Wall Street Journal’s survey of 69 business, academic and financial forecasters was conducted Jan. 7-11. Not all participants answered all questions. The survey archives and forecast data are available here.