The risk of a declining economy, increasing unemployment
Bloomberg’s latest monthly survey of 70 economists, forecasts that the US Gross Domestic Product (GDP) could grow by 0.5% in the second quarter of 2023, less than half of GDP growth in the first quarter. Experts believed that the US economy will continue to slow down in the second quarter of this year, in the context of declining consumer spending and investment, causing the US economy to fall into recession in the second half of the year.
Wilmington Trust Corp chief economist Luke Tilley said that as companies grapple with higher costs and limited credit this year, cutting investment and employment will lead to a mild recession in the second half of the year. According to surveyed economists, the risk of a US economic recession in 2024 remains at 65%.
Meanwhile, the US Department of Labour’s report showed, that the Producer Price Index in April 2023 increased by 2.3% compared to the same period in 2022, the lowest increase since January 2021, after a 2.7% increase in March 2023. Meanwhile, the number of weekly unemployment claims increased to 264,000.
Analysts worry that the above figure is a sign that layoffs have recently started to increase, especially in areas such as technology, real estate and finance. According to Moody’s Analytics, the plan proposed by US House Speaker Kevin McCarthy to raise the debt ceiling and cut federal spending, will slow growth and cause more serious job loss.
If the plan presented by McCarthy is approved, US GDP growth in 2024 will “lose” 0.6 percentage points and 780,000 jobs will be cut, while the unemployment rate in the US will increase to 4.6% from 3.5% in March 2023.
According to experts, the biggest concern with the US economy is the risk of default, leading to a catastrophic economic crisis, not only in the US but also in the global economy. At a recent meeting for pro-Democratic activists, US Vice President Kamala Harris and White House top economic adviser Lael Brainard warned that the world’s largest economy will fall into a recession if the US government default scenario comes true.
Jeff Tucker, a senior economist at tech real-estate marketplace company Zillow, said that the US default will have unprecedented impacts on the financial system, thereby pushing up borrowing costs and dragging down home sales. In Zillow’s analysis, if the US defaults on a long term, interest rates will rise sharply and peak at 8.4%, while the unemployment rate will rise from the current 3.4% to a peak of 8.4%.
“The public debt ceiling war” has no end
The US public debt limit is usually adjusted regularly, however, due to disagreements between Democrats and Republicans, the issue of raising the debt ceiling is still stuck over the two sides’ controversies. President Biden wants to raise the debt ceiling unconditionally, while Republicans said raising the debt ceiling from the current 31.4 trillion USD should be accompanied by strong spending cuts.
On May 19, negotiations on the US government’s debt ceiling reached an impasse after House Speaker Kevin McCarthy said that the White House did not move to cut spending. Previously, the US Congressional Budget Office warned of US debt default on June 15, if lawmakers failed to reach an agreement with President Joe Biden, on raising the debt ceiling. For weeks, policymakers, US bank officials and the White House have warned of the risk of default, with major impacts such as economic recession and global financial implications.
US Treasury Secretary Janet Yellen said: “A default would threaten the gains that we’ve worked so hard to make over the past few years in our pandemic recovery. And it would spark a global downturn that would set us back much further. It would also risk undermining US global economic leadership and raise questions about our ability to defend our national security interests.”
Earlier, the US Treasury Secretary announced that she would have private conversations with Chief Executive Officers (CEOs) to warn about the dangerous consequences of the current standoff over the debt ceiling. US Government officials are also asking business owners to pressure Republicans to raise the debt ceiling without conditions.
Despite the difficulties, challenges and the risk of a “debt bomb”, US President Joe Biden still believes that the US can avoid the risk of default. On May 20, Biden said at a press conference at the G7 Summit in Hiroshima, Japan, that “I still believe we’ll be able to avoid a default and we’ll get something decent done.”
Meanwhile, US Treasury Secretary Yellen warned of serious consequences of the risk of the US government defaulting but affirmed that the US economy would continue to grow. “I think the outlook remains one for moderate growth and a continued strong labour market with inflation coming down,” Secretary Yellen said.
President Biden cut short his Asia-Pacific trip to return to Washington, to untie the knot in negotiations, to raise the public debt ceiling with Republicans. In the past, the US political parties repeatedly faced fierce confrontations in negotiations to raise the public debt ceiling and the negotiations often “had a happy ending” at the last minute, because all parties have to put national interests above all.
It is hoped that before the “default time” on June 15, the US Democrats and Republicans will once again find a common voice on the issue of raising the public debt ceiling. At that time, the US will get rid of the anxiety of default to regain growth momentum and accordingly, the global economy will also avoid an unnecessary shock from the US debt bomb.
