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US Federal Reserve
OpinionComment
David Brown
David Brown

Macroscope | Why the Fed should go easy on the world economy in 2023

  • It is consumers who pay for the cost of the pandemic and the energy price spike. It is also consumers who drive economic growth
  • With the world economy headed for tough times and US mortgage rates hitting a high, the Fed shouldn’t inflict higher rates and greater pain

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A pedestrian carries a shopping bag in the Georgetown neighbourhood of Washington on November 9. Consumer confidence has already been deeply shaken by the pandemic and the war in Ukraine, but the cost-of-living squeeze is leaving a deeper wound. Photo: Bloomberg
David Brown
Spare a thought for the mass of hard-pressed consumers struggling to contend with the pandemic, a global slowdown, the cost-of-living crisis and rising borrowing costs. It hardly sets the scene for sustainable recovery any time soon and the odds are that large parts of the global economy are heading for much tougher times and perhaps even recession in 2023.
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At the end of the day, someone has to pay for the cost of the Covid-19 crisis and the energy price spike and the buck generally stops with consumers, in the form of higher taxes and spending squeezes, as governments seek to stay in control of public sector finances.

The problem is that central banks have lost patience with inflation and the cupboard is bare in terms of what governments can afford to spend on reflation.

With consumer spending accounting for the lion’s share of gross domestic product, it hardly bodes well for the coming months. Consumer confidence has already been deeply shaken by the pandemic and the war in Ukraine, but the cost-of-living squeeze on disposable incomes is leaving a deeper wound as households are forced to economise and cut back on spending.

There are worries about job security too as companies seek cost savings, adding extra pressure as unemployment levels start to creep higher. The Organisation for Economic Co-operation and Development reports that the unemployment rate in the OECD area was stable at 4.9 per cent for September, slightly above its low point of 4.8 per cent recorded in July 2022, but the odds are that the jobless rate will rise a lot more as global headwinds intensify and business confidence dives.

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It’s no surprise to see consumer confidence levels showing signs of deep duress. For the 38 OECD member states, consumer optimism is close to an all-time low. It’s even weaker than the lowest points reached during the 2020 pandemic and after the 2008 crash.

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