The economy | The US economy cools down and the risk of recession increases

The US economy has already contracted for two consecutive quarters.

of the United States an overheated economy is cooling down.

Based on preliminary data published by the Ministry of Trade on Thursday, the economy shrank at an annual rate of 0.9 percent in April–June, i.e. 0.2 percent from the previous quarter.

In the first quarter, i.e. January–March, the gross domestic product decreased at a rate of 1.6 percent, i.e. 0.4 percent from the previous quarter.

The most significant reason for the contraction of the economy is the decrease in the inventories of companies.

“This tells us that companies are already preparing for worse times. On the positive side, consumption in the United States increased slightly. The decrease in construction reflects the increase in financing costs,” says the chief economist of the financial company Nordea Wind Birch.

One according to the often used definition, the economy is in recession if the gross domestic product shrinks for two consecutive quarters.

In the United States, the authorities use more measures to define a recession than just gross domestic product, which means the total value of goods and services produced for final consumption.

Preliminary data on gross domestic product must also be treated with caution, as they usually change as the data becomes more precise.

OP non-economist of the finance group Reijo Heiskanen does not believe that the US economy will sink into an officially defined recession this year.

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“Economic growth slowed down in June-April mainly due to the decrease in companies’ inventories, and this trend may change during the current year. I think it is still premature to talk about a recession, but the state of the economy next year is a different matter.”

Economic growth the slowdown causes headaches especially for the US central bank. It has strongly tightened monetary policy this year in order to curb the strongly accelerated inflation, i.e. the rate of increase in consumer prices.

When monetary policy is significantly tightened, it leads over time to a decrease in corporate investment and a reduction in household consumption. Governor of the Central Bank Jerome Powell calmed recession worries on Wednesday by citing that there is plenty of demand in the labor market. According to Powell, the United States is not in recession.

This year, the central bank has already tightened monetary policy four times: in March by 0.25 percentage points, in May by 0.50 percentage points, in June by 0.75 percentage points and on Wednesday by 0.75 percentage points.

The tightening of monetary policy usually starts to slow down the rate of inflation after six months and reaches its full effect in a good year.

“Economic growth is slowing down due to accelerating inflation, tightening financial conditions and a very tight labor market. The US economy is at the limit of its production due to high demand and therefore it is fully expected that economic growth will slow down. I don’t think that the central bank would change its plans to tighten monetary policy based on the new information, because inflation has to be brought under control,” says Koivu.

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A tight labor market means that the demand for labor is greater than the supply.

Inflation rate In the United States, it accelerated to 9.1 percent in June, which was the strongest in more than 40 years. The exceptionally strong inflation is due to disruptions in supply and a noticeable increase in demand, which has been increased by fiscal stimulus.

In June, the cost of energy in the United States rose by 42 percent compared to the same time last year, food by ten percent, new car prices by 11 percent and housing by six percent. The price of gasoline has risen by 60 percent within a year.

“The central bank is in a difficult position, because inflation is unlikely to slow down in the near future, as wages have also clearly risen. The United States has full employment, which is one of the central bank’s goals to achieve. When this goal has already been achieved, the central bank can focus on curbing inflation, but the slowdown in economic growth will of course give it a lot to think about.” , Heiskanen says.

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Chief Economist of the International Monetary Fund (IMF). Pierre-Olivier Gourinchas said on Tuesday that central banks should not delay tightening monetary policy, even if it has real economic costs. Delay would only worsen the economic hardships.

Helsinki university professor of economics Niku Määttanen thinks the central bank has valid reasons to fight inflation by tightening monetary policy.

“The drop in gross domestic product does not mean that the central bank will give up tightening monetary policy. All signs point to production capacity in the United States being almost fully utilized. Therefore, a lighter monetary policy would hardly increase production. Widespread and rapid inflation is a bigger problem than a slight slowdown in economic growth.”

The longer inflation remains unusually rapid, the more likely this will affect inflation expectations, which in turn will become self-fulfilling. For example, workers and companies agree on large nominal wage increases if they expect prices to rise quickly.

Read more: There may be more “abnormally large” interest rate hikes, says Jerome Powell of the US Federal Reserve Bank – The risk of a recession is growing

Read more: The International Monetary Fund warns: the global economy is threatened by a new recession

Read more: Central banks were mistaken about how permanent and widespread strong inflation is, says economist

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