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U.S. Economy: Banking crisis will lead to contraction of the economy

The U.S. economy is in turmoil and exposed to high risks. The banking stress, the debate about raising the debt ceiling, higher interest rates, geopolitical tensions, and the weakening global economy are likely to lead to a recession this year.

In the United States, gross domestic product increased by only 0.3 percent in the first quarter of 2023 compared with the previous quarter (annualized 1.1 percent). While private consumption still grew robustly, business investment expanded only slightly. Business inventories have decreased, and the high level of consumer demand was probably serviced to a not insignificant extent by inventories. The downward trend in housing investment continued at a somewhat slower pace. This development is also likely to be a consequence of high inflation and the monetary policy tightening that began in spring 2022. Positive impetus for the US economy still came from foreign trade in the first quarter of 2023; exports increased more strongly than imports.

At the end of the first quarter, the onset of the banking crisis with the collapse of Silicon Valley Bank, followed by others in recent weeks, significantly increased economic risks. Lending has already been reduced and uncertainty among companies and households has increased noticeably. Economic development indicators also recently pointed to an economy in a crawl. The purchasing managers’ index is below the expansion threshold of 50, but at least industrial production has increased weakly of late. Consumer sentiment has improved somewhat compared with the low point in summer 2022, but is still pessimistic.

In the current year, the US economy will expand without much momentum. In addition to higher interest rates and lower real wages, problems in the banking sector have been weighing on the U.S. economy since the collapse of Silicon Valley Bank in mid-March; lending to companies and households is likely to decline even more than was already to be expected as a result of the interest rate hikes. Although a full-scale financial crisis like the one in 2008 seems unlikely at present, the risks of such a scenario are heightened. Against this background, consumer demand will probably initially decline somewhat in the coming quarters before small positive rates can be expected again, especially in the coming year. Private consumption is at least being supported by the low unemployment rate, which was only 3.6 percent in February. The weak momentum of private consumption and higher interest rates mean that no growth can be expected in business investment either; here, too, there is likely to be an initial contraction. This development is also dampening imports. As exports will also only increase moderately due to the slow recovery of the global economy, the trade deficit will remain roughly constant.

There is currently no tailwind for the US economy from economic policy. In a few weeks’ time, American politicians from both parties will have to agree on an increase in the debt ceiling. It can be assumed that such a bipartisan compromise will include cuts in social programs, for example. The Inflation Reduction Act, which was passed in the summer of 2022 with a volume of just under $400 billion and is intended in particular to promote investment in renewable technologies, is spread over ten years and will have a noticeable but minor impact on the economy in the individual years. Monetary policy has rapidly become less expansionary over the past year. To be sure, inflation has gradually declined with falling energy and food prices in the fall and winter. But core inflation in particular, which excludes energy and food prices, remains in a range well above the central bank’s average two percent target. For monetary policy, an increasing dilemma is emerging between fighting inflation, financial market stability and arguably increasing concerns about economic development.

All in all, according to my baseline scenario, the U.S. economy will probably go through a – hopefully – mild recession in the current year, but will still grow by 0.7 percent on average for the year. A growth rate of only 0.6 percent is also expected for 2024. Inflation will still be significantly elevated at 3.9 percent in the current year and will not fall below two percent until 2024. Unemployment is expected to rise gradually over the coming quarters.

I continue to be rather pessimistic about the economic outlook. Rapid interest rate hikes and problems in the banking sector could well trigger a more severe economic crisis than I am assuming here.

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Global economy faces sluggish recovery

While catch-up effects following the waning of the Corona pandemic helped the global economy in the first half of 2022, rising inflation and higher interest rates slowed growth in almost all economies in the second half of the year. In the fourth quarter, the global economy grew by only 0.3 percent. All in all, however, the economy held up much better than had been feared in many places in the early fall of 2022. In the first quarter of 2023, inflationary pressures eased slightly and consumer sentiment lifted somewhat. Robust labor markets in particular are boosting consumer sentiment and supporting the economy. However, the global economy will recover only sluggishly this year with growth of 2.8 percent and next year of 3.4 percent, especially as no tailwind is expected from monetary and fiscal policy. Risks exist above all if the criticism in Ukraine escalates, China’s relationship with the West deteriorates, and turbulence on the capital markets increases as banks flounder.

The global economy lost considerable momentum in the fourth quarter of 2022. Economic growth was just 0.3 percent; in the third quarter, growth had still been a solid 1.2 percent. It is noteworthy that almost all economies experienced weak growth or even contraction. In the fourth quarter, catch-up effects after the pandemic subsided, which had previously supported the economy, played a lesser role than in the spring and summer of 2022. By contrast, the negative effects on the global economy that had already emerged at the beginning of the year made themselves felt more strongly in the fourth quarter, i.e. in particular high energy and food prices and generally higher inflation, which dampened household purchasing power. At the same time, the interest rate increases implemented by many central banks in the wake of higher inflation gradually put more of a brake on economic activity; a contraction in construction investment in particular was observed in many places.

In the euro zone, GDP stagnated in the final quarter of 2022, with both household consumption and investment declining. Economic development was supported by foreign trade, although this was less due to dynamic growth in exports. Rather, imports decreased, probably as a result of weak consumption and investment. Within the euro zone, developments were heterogeneous. While the economy contracted in Italy – as in Germany – the other major member countries France and Spain recorded slightly positive growth rates. The somewhat more favorable development in these countries is probably also due to currently lower inflation and a less pronounced energy crisis than in Germany and Italy. All in all, however, the euro zone economy held up much better than feared in early fall 2022. The economies of other European economies also performed weakly in the final quarter of 2022. In the United Kingdom and Switzerland, economic output still increased minimally. In Poland, the Czech Republic and other countries in Central and Eastern Europe, where inflation rates are very high and the effects of the war in Ukraine are particularly pronounced, the economy contracted in many places.

Overall economic production in the USA expanded even more strongly, with growth of 0.7 percent compared with the previous quarter. However, this significant growth was also due to a sharp increase in corporate inventories, presumably because households bought fewer goods than companies had anticipated. Against the background of high inflation and monetary tightening, domestic demand increased only slightly. An economic slowdown was also evident in the Asian economies in the fourth quarter of 2022. In Japan, gross domestic product stagnated, even though tourism was revived by the opening of the country to foreign visitors. Economic development was even weaker than in Japan in South Korea, where economic output declined at the end of the year. The cooling of the global economy there led to lower exports of electronic equipment, for example. In China, the economy stagnated in the final quarter of 2022. The strict measures to contain the pandemic still in force until early December and the smoldering debt problems in the real estate sector weighed on economic momentum. In the other emerging markets, the economy still grew in many places in the fourth quarter of 2022, but often at lower rates than before. India and Mexico, for example, recorded a marked slowdown in growth. In Brazil, economic output even declined slightly. The Russian economy is a special case. It is being hit hard by the war of aggression against Ukraine and the Western economic sanctions. The continuing or even increasing trade relations with other emerging countries, which do not or only partially support the Western sanctions, have so far prevented an even more significant decline in economic output.

No tailwind for the economy from economic policy

In the final quarter of 2022 and last winter, inflationary pressures eased somewhat in both the advanced economies and the emerging markets as commodity prices eased, but in many places they still remained well above the targets set by the respective central banks. Core rates in particular have recently remained at a high level in the United States and the euro area. Against this background, the central banks of most advanced economies continued to raise their key interest rates significantly in the winter months. However, the tighter monetary policy probably contributed in March to several banks in the United States – including Silicon Valley Bank and the regional bank First Republic – getting into difficulties and either collapsing or having to be rescued. A national banking crisis has so far been prevented by rapid rescue measures by the Federal Reserve. However, concerns about the stability of the financial system will lead the U.S. Federal Reserve to raise interest rates less sharply than might be expected in view of the inflation trend. In the euro zone, there have been no significant problems at commercial banks so far, but here, too, key interest rates will now rise less sharply than expected in February. Concerns about possible problems in the banking sector are leading central banks to walk a difficult tightrope between fighting inflation and maintaining financial market stability.

In both the USA and the euro area, inflation is likely to decline only slowly and remain noticeably above the central banks’ inflation targets for the time being. A similar development is expected in the United Kingdom and Switzerland. In Japan, key interest rates have so far remained unchanged, although inflation has recently been above 3 percent. Compared with other advanced economies, inflation is lower and even less broad-based. In China, there has been no surge in inflation so far, probably also because of subdued domestic demand due to pandemic control measures and the real estate crisis. In other emerging countries, such as India, Brazil and Mexico in particular, inflation rates are declining from a high level, partly due to sharp increases in key interest rates.

Fiscal policy is likely to be less expansionary in the forecast period than in the pandemic years. Support measures adopted during the Corona pandemic have been discontinued. However, programs have been added, for example in Europe and in many emerging countries, to cushion the impact of high inflation, especially on low- and middle-income households. Medium-term investment packages adopted in the European Union (NextGenerationEU) and the USA (Inflation Reduction Act and other infrastructure measures) are also having a minor stimulating effect on the economy, in particular to accelerate the ecological transformation.

Slow recovery with slowly declining inflation

In the forecast period, the global economy will recover only slowly from its current phase of weakness. In the industrialized countries in particular, the outlook is subdued. No tailwind is expected from monetary and fiscal policy. Added to this are still higher energy prices, risks in the banking sector and high geopolitical uncertainty. Nevertheless, the developed economies are likely to experience a gradual upturn after a weak first quarter. Inflation rates are declining slightly and the energy crisis has eased somewhat, at least temporarily. Both consumer confidence and business sentiment have recently improved somewhat. In the United Kingdom, the economic situation is still somewhat more fragile than in the rest of Europe, and GDP is therefore likely to decline further until the summer.

Private consumption in the advanced economies in particular is being supported by shortages on the labor markets. Unemployment is low, also against the background of demographic change and the shortage of skilled workers; most people need not worry about losing their jobs at present. However, the reduction in the purchasing power of many households triggered by high inflation is acting as a brake.

In most emerging countries, too, growth is expected to be stronger in the course of this year than in the winter. In India, but also in Brazil and Mexico, interest rates are now likely to peak gradually. Exports will gain some momentum against the background of a gradually more dynamic global economy. The only country where the economy is likely to grow significantly faster than in 2022 is China, where a solid increase in domestic demand can be expected following the end of the zero-covid policy.

All in all, growth in global production will be only modest this year. However, following a growth rate of just 2.8 percent, somewhat stronger growth of 3.4 percent is expected in 2024. Unemployment rates are expected to remain low against the background of continuing shortages on the labor markets. Inflation will gradually decline, but will still remain above the central banks’ targets on an annual average in 2023. Inflation rates will not return to normal until 2024.

The biggest uncertainty factor for the economy lies in the further course of the war in Ukraine. For example, there could be a further escalation of the conflict, which in particular could increase geopolitical uncertainty and cause commodity prices to rise more sharply again. Economic development in the world and especially in Europe would be further affected by this. However, an easing of the conflict – for example in the form of a ceasefire – is also conceivable, which would probably lead to a stronger revival of global economic development than assumed in this forecast.

However, the risk of geopolitical crises or even armed conflicts is also heightened in other regions of the world. In Asia, for example, geopolitical crises continue to smolder around Taiwan and the Korean peninsula. In this context, the ongoing political tensions between China and Western countries, especially the USA, should also be mentioned. The risk of a rapid deterioration in relations between China and the Western countries is increased, which would lead not least to distortions in international trade and capital flows.

The situation on the financial markets was added as a further risk to economic development in March. As a result of the rapid interest rate increases in the United States, risk management problems have come to light at some banks. Following the collapse of Silicon Valley Bank, a rescue program was put in place by the US Federal Reserve to support regional banks in particular. In Switzerland, too, there was a government-backed bailout of the bank Credit Suisse, which resulted in the merger with the bank UBS. So far, the problems at individual banks have not resulted in a large-scale financial crisis. However, the risk of this is increased and would stall the economic upturn assumed in this forecast.

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Political paralysis in the United States likely – also a problem for Europe?

After the midterm elections in the U.S., there is hardly any time to take a deep breath on the political level. For now speculation will begin as to which of the Democrats and Republicans will enter the race for what will probably be another controversial presidential election in two years’ time. Although the midterm elections may strengthen the more moderate forces in both parties somewhat, society remains divided on many issues. This means political uncertainty at a time when the U.S. economy is likely to slip into recession or at least a slowdown in growth with rising unemployment. With inflation still high and only slowly declining, the Fed has little choice but to continue to raise interest rates sharply. If inflation does not come down faster than generally expected, interest rates will probably rise from today’s four percent to around five percent. The more restrictive monetary policy will slow down the U.S. economy until the presidential elections in November 2024, which is likely to hurt the Democrats in particular as the party of the incumbent.

Fiscal policy, on the other hand, is likely to be much more passive. The opportunity for Biden to boost the cooling economy by increasing spending will probably be limited. The Republicans will probably try to put the brakes on Joe Biden’s plans, which is likely to paralyze political activity to some extent. In view of the arguably too extensive and inflation-driving fiscal packages during the pandemic, a more passive fiscal policy can certainly be viewed positively from a macroeconomic perspective. However, there is also a downside: a recession without a simultaneous fiscal stimulus will make the economic situation more difficult for many people and the election campaign even more heated than is already to be expected. There is also a risk that the regularly scheduled increases in the debt ceiling for the federal budget will once again become the plaything of party interests, increasing the risk of default.

The political paralysis and the two years until the uncertain outcome of the U.S. presidential election come at an inopportune time for the European economies. They are already being jolted by the energy crisis, dramatically high inflation and the cooled global economy. All in all, the U.S. economy is less affected by these factors, and it has also digested the pandemic-related economic slump better than the euro zone. For example, U.S. economic output returned to the pre-crisis level of late 2019 as early as the early summer of 2021, whereas this was not the case in the euro area until the end of 2021 and in Germany, for example, until the summer of 2022.

In addition to all the other burdens on the European economies, there is now uncertainty about the political course of the United States after the upcoming presidential elections – for example, with regard to the future of transatlantic trade relations, support for climate policy goals or the military umbrella for Europe. Such uncertainties could, for example, reduce companies’ propensity to invest and further dampen the already gloomy economic outlook. However, the threat of weak economic development makes it more difficult in Europe to finance the energy turnaround or infrastructure renewal. In the USA, too, investment is needed in the energy turnaround and infrastructure; under Joe Biden, the US government has already made substantial financial resources available for this in the coming years. Against this backdrop, the looming political paralysis until the presidential elections is manageable for the USA in terms of economic policy. Or to paraphrase an old saying of former U.S. Treasury Secretary John Connally from 1971: While the upcoming presidential elections are extremely important, especially for the U.S. itself, they will also be a major problem for Europe because of their great significance and the uncertainties surrounding the outcome.

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Economic slowdown hits euro zone in worse shape than the USA

The global economy is severely impacted by various factors in the summer of 2022. Many countries are on the brink of recession. The Corona lockdowns in China and, from a European perspective, the war in Ukraine in particular, are reducing growth in many places, fueling inflation and bringing the euro zone in particular, but also the United States, to the brink of recession. The Chinese economy is also likely to show low growth rates this year and will not be able to act as an economic locomotive. After the financial crisis, Chinese stimulus programs were stimulating the global economy.

In the first half of 2022, economic output in many countries was already only moderate or even declining. The US economy, for example, contracted by 1.6 and 0.9 percent in the first two quarters of 2022 (annualized). The purchasing managers’ indices and consumer sentiment also point to subdued growth in the summer half-year. In addition, monetary policy is rapidly becoming more restrictive in view of high inflation on both sides of the Atlantic.

In the euro zone, the economy grew by 0.6 percent in the first quarter. However, this was primarily due to still strong export growth and a high inventory build-up. However, private consumption and investment have already declined somewhat. In the euro zone, too, in view of the depressed assessment of the economic situation and outlook among both companies and consumers, only stagnation is to be expected in the summer half-year. The global economy continues to be severely impacted by the war in Ukraine and the Chinese corona crisis. Recently, in particular, concerns about an impending gas shortage and even higher energy prices have increased noticeably again. These developments are also contributing to inflation remaining high. In addition, the export industry is suffering from the weak global economy. At present, the order backlog is still high. However, it can only be processed slowly because global supply chains are still disrupted and the shortage of starting products remains serious in many places. Although there are signs of a gradual easing in supply chains, the war in Ukraine and the lockdowns in China will probably continue to contribute to increased problems in the coming months. Supporting the economy, at least for the time being, are still the services, which are benefiting from the easing of the Corona protection measures. Tourism and the food service industry in particular are enjoying a good start to the summer. However, this recovery process is now gradually coming to an end. In addition, high inflation is significantly reducing household purchasing power, which is contributing to a marked deterioration in consumer sentiment.

Somewhat later than the U.S. Federal Reserve, the European Central Bank (ECB) raised its key interest rates in July to counter high inflation and dampen inflation expectations. In addition, the securities purchase program was ended in June. The increasingly restrictive monetary policy will further dampen the already weak economic growth and, together with the consequences of the war in Ukraine and the corona crisis in China, will probably lead to a slight decline in economic output in some euro area countries.

Looming recession hits euro area at an inopportune time

The growth freeze is hitting the euro area economies in worse shape than that of the United States. The U.S. economy digested the pandemic-induced slump in spring 2020 more quickly than the euro area. For example, the U.S. economy regained its pre-crisis GDP level of late 2019 as early as early summer 2021, whereas this was not the case for the euro area until about a year later.

An important reason for the rapid recovery in the United States is probably the extremely expansionary fiscal policy during the pandemic. In total, three fiscal packages amounting to nearly 15 percent of U.S. gross domestic product were passed in 2020 and 2021 under Presidents Trump and Biden. These fiscal packages have stimulated private consumption. In the euro area, by contrast, private consumption has not yet reached pre-crisis levels even at the beginning of 2022.

Even from the last major economic crisis – the financial crisis which originated in 2007/2008 – the US economy recovered more quickly than the euro zone. This is also due to the debt crisis that started in several euro area countries at the beginning of the last decade. As a result, economic output in the United States increased by around 25 percent between 2008 and 2021, while gross domestic product in the euro area increased by only 12 percent. In particular, the debt crisis in some euro area countries has widened the growth gap between the two economic areas.

Not only has economic output and private consumption developed significantly better in the USA than in the euro area, but so has investment in equipment – in other words, those key investments that are of great importance for long-term economic development. Looking at the entire period since 2008, equipment investment in the euro area has increased only marginally, while in the USA it has risen by more than 50 percent. Equipment investment in the euro area has also not yet fully recovered from the pandemic, while in the USA it was already well above pre-crisis levels by the beginning of 2021. The subdued investment trend is reducing growth prospects in the euro zone. At the same time, there is a high need for investment in Europe, particularly to successfully shape the energy transition and digitization. At least there is reason to hope that the “Next Generation EU” instrument will provide some impetus for investment in the euro area in the coming years.

Also important for long-term economic development are investments in research and development as well as software, which are part of intellectual property products in the national accounts. However, the data should be interpreted with some caution, as these are difficult to determine due to their intangible nature, among other things. After all, the development in the euro area was for a long time similarly dynamic as in the USA. In both economic areas, these investments have increased by around 70 percent since the financial crisis. Since the pandemic, however, a clear gap seems to have opened up between the United States and the euro area, according to the official figures. While the United States appears to be experiencing a boom in these intangible investments, they have plummeted noticeably in the euro area.

So even before the outbreak of the war in Ukraine, the euro area had already fallen further behind in growth during the pandemic. In this respect, it is also helpful to compare the forecasts for 2020 and 2021 made by the International Monetary Fund at the end of the year with actual developments. This comparison suggests that economic output in the United States in 2021 was only slightly more than one percent below the level assumed at the end of 2019. In the case of the euro area, on the other hand, there was still a gap of more than four percent.

Various scenarios conceivable for the coming economic development

Before the outbreak of the war in Ukraine, it could be assumed that the U.S. economy would achieve the growth path assumed by the International Monetary Fund at the end of 2019 in the current year. For the euro area, on the other hand, the International Monetary Fund assumed in January 2022 that the growth trend expected before the pandemic would still not be achieved in 2024 and that a prosperity gap of just over one percent of gross domestic product would probably remain. 

The war in Ukraine, which is a tragedy for the people affected, is now leading the global economy into a second crisis shortly after the pandemic. Similar to the debt crisis after the financial crisis, the war is now likely to put the brakes on economic recovery. In the further course, only low positive or even negative growth rates are to be expected in the developed economies. The headwinds are blowing too hard: Inflation, war in Ukraine and lockdowns in China all continue to weigh on economic development. Added to this is a monetary policy that is rapidly becoming more restrictive in the face of inflation. The US Federal Reserve and the ECB will continue to raise interest rates rapidly and make their monetary policies more restrictive.

As with the debt crisis ten years ago, the euro area is economically more affected by the war in Ukraine than the United States for obvious reasons. The growth gap with the United States is thus likely to widen further. An important difference to the debt crisis in the euro area today, however, is that the German economy is no longer the driving force in economic growth, but is one of the laggards, mainly due to its high energy dependence on Russia to date.

Two scenarios illustrate an approximate order of magnitude for the widening growth gap between the USA and Europe up to 2024, assuming further developments in GDP up to 2024 for the USA and the euro zone by means of a positive and a negative scenario for each (Fig. 4). These scenarios are not to be understood as complete forecasts, but are intended to illustrate how economic output could develop under the respective scenario. In the positive scenario, it is assumed that the central banks of the USA and the euro area succeed in controlling inflation with a more restrictive monetary policy in such a way that no recession occurs. In addition, it is assumed that the conflict in Ukraine will continue but that there will be no sudden halt in gas supplies to Europe. The negative scenario, on the other hand, assumes that the central banks will have to tighten the monetary reins to such an extent that a recession with a weak recovery will result. In addition, there will be a halt to gas supplies to Europe in the fall of 2022.

Even in a positive scenario, the GDP growth assumed at the end of 2019 will still not be achieved in the USA in 2024, leaving a gap of around one percent of GDP (Fig. 4). In the case of the euro zone, on the other hand, gaps of almost three percent will remain even in the positive scenario. A gap of a similar size would only arise for the United States in the negative scenario. By contrast, in this negative scenario, gaps of almost five percent will remain in the euro area in 2024. The pandemic and the ensuing war would then result in long-lasting losses in prosperity – also due to the triggered high inflation and monetary tightening.

I published an earlier version of this text on June 30.

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What caught my eye: The future of jobs, the international economic agenda of Biden, money market funds, and much more…

The Future of Jobs Report 2023 from the World Economic Forum. How will jobs and skills evolve over the next years? Always a good read, although one might not agree with everything.

https://www.weforum.org/reports/the-future-of-jobs-report-2023/

“The Biden administration’s international economic agenda: A conversation with National Security Advisor Jake Sullivan” Highly recommended:

“Money market funds and the pricing of near-money assets” by Sebastian Doerr, Egemen Eren and Semyon Malamud:

https://www.bis.org/publ/work1096.htm

“The Economic Threat of Undisciplined Geopolitical Primacy”, good article by Jean Pisani-Ferry

on a very important topic:

https://www.project-syndicate.org/commentary/prioritizing-geopolitics-over-economic-prosperity-severe-consequences-by-jean-pisani-ferry-2023-05?barrier=accesspaylog

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German economy faces fragile and sluggish recovery

After the German economy experienced a small interim low in the winter half-year, the hoped-for upturn is likely to begin in the current second quarter. The upturn is likely to be tentative and fragile, at least for the time being.

German industry in particular is currently on the road to recovery. Both production and new orders increased in January and February, and supply chains have recently eased. Nevertheless, the situation is only expected to improve gradually as the weakening global economy acts as a brake. In addition, the continuing economic and geopolitical uncertainty and the significant interest rate increases by the European Central Bank are having a dampening effect on investment activity.

In the services sector, business expectations in Germany actually declined slightly in April after a period of recovery. In addition, retail sales have recently declined slightly. Although the consumer climate has bottomed out, consumers are still rather pessimistic about the future, partly because inflation has risen more sharply than incomes for many households. However, unemployment remains low, which is supporting private consumption. “The German economy is picking up. However, it is still clearly battered by high inflation and the energy crisis and is unlikely to develop too much momentum this year.

High inflation rates, war in Ukraine, concerns about financial market stability, uncertainty about China and the situation in Taiwan, as well as rising interest rates are just some of the numerous economic risks.

In my baseline scenario, I expect the German economy to experience a sluggish recovery. Overall, the economy will grow by 0.1 in 2023 on average. Economic output will grow by 1.2 percent in 2024. Inflation will remain high in 2023 but will approach the two percent target of the European Central Bank in 2024. My baseline scenario is somewhat more pessimistic than the forecasts of some of my colleagues. Many of them now expect the economy to expand more strongly in 2023.

In an alternative scenario, Germany experiences a more severe recession. In this case, the economy will contract -0.5 percent in 2023 and see an even more subdued recovery in 2024 with a growth rate of 0.8 percent.

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What caught my eye: Cognitive abilities, central banks and climate change, foreign technology adoption, and much more…

“Your job can shape your cognitive abilities: Restaurant workers whose job involved constantly keeping track of orders were better at tests of working memory updating.” Interesting (obvious on second thoughts):

https://www.bps.org.uk/research-digest/your-job-can-shape-your-cognitive-abilities

Interview with Paul Romer (2018 Nobel Laureate in Economic Sciences) of New York University. Interesting and straight to the point: https://hdsr.mitpress.mit.edu/pub/zgu2u8y6/release/2

“Foreign Technology Adoption as a Flying Propeller” by Yunfang Hu, Takuma Kunieda, Kazuo Nishimura & Ping Wang. In Asian economies, “technology-embodied FDI served as a flying propeller, explaining almost two-thirds of their economic growth”:

https://www.nber.org/papers/w31159

“Is the five-day work week becoming something of the past? Does working less make us and the organisations that we work for better off? Could it even make us more productive?” Interesting podcast from the Productivity Institute:

“US Economic Outlook: Mid-April Update” from EY Parthenon. Rather pessimistic: “The economy is unwell. It’s not the flu, but it is a throat ache. And it’s unlikely to get better in the coming months.”

https://www.ey.com/en_us/strategy/macroeconomics/us-economic-outlook-mid-april-update

“Is China’s industrial policy working?” another highly interesting trade talks podcast:

“The role of central banks in the macroeconomics of climate change” Speech by François Villeroy de Galhau, Governor of the Banque de France:

https://www.banque-france.fr/en/intervention/role-central-banks-macroeconomics-climate-change

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How to Value Employees as Technology Takes Center Stage

guest post by Charley Sunday, creator of astrongfoundation.net

Technology is transforming every industry under the sun, from legal to healthcare and everything in between. You may have heard of the buzzwords: automation, the Internet of Things (IoT), AI and machine learning, Big Data, ChatGPT, and hybrid or remote work. While this is a blessing, there are some side effects – human workers being displaced, made redundant, or feeling undervalued due to changes to work processes and jobs in general. What are the benefits and drawbacks of digital transformation? How you can make employees feel more valued during these times of change?

Salesforce notes that digital transformation is the use of computer-based technology to upgrade work processes. The biggest benefits of digital transformation are improved efficiency, extra value, opportunities for innovation, and the reduction of labor-intensive work processes.

The biggest drawback – besides the added complexity, overheads, and data security concerns – are the negative effects on human workers. According to a Turbo Future, technology can cause a social disconnect, work overload, privacy problems, addiction, secondhand living, and job insecurity. Many employees working fully remotely also report psychological problems.

Value Employees More Through Concrete Action

Your workers may be experiencing some or all of the problems we mentioned above. You’ll have to take concrete action to reduce the ill effects and make life better for your employees. Here are some suggestions:

Provide More Social Interaction

Sitting behind screens all day or working from a digital office remotely doesn’t always offer many opportunities for social interaction, which can lead to feelings of alienation, loneliness, and segmentation between teams and departments. Social interaction – through game nights, ice breakers, meetings, and meet-ups (offline or online) – can make employees feel more connected to other people (and your organization in general).

Give and Receive Feedback

Nothing makes people happier than knowing their work is making a difference. It’s icing on the cake if their concerns are being heard and, even better, acted upon. You can do both by instituting, as Forbes puts it, a “feedback-rich” culture in your company. This is when feedback is encouraged between all members of the organization and, typically, a unified platform for communication is offered where team members can communicate in a safe environment. 

Support Your Remote Workers’ Mental Health

Remote workers are more prone to experiencing mental health issues such as burnout, anxiety, and depression. Employers can offer mental health support through training sessions or sponsoring psychologist visits. Also some other strategies are providing flexible schedules, offering in-person work opportunities, promoting work-life balance, and checking up on employees from time to time.

Provide a Stellar Benefits Package

There are some employee benefits that you are required to provide, like social security, worker’s compensation, and FMLA coverage. However, going above these basic benefits can show your employees how much you value them and want them to be happy and healthy. Health insurance and paid time off are the bare minimum of non-required benefits, and not including them usually turns employees off. But adding additional perks, like life insurance, tuition reimbursement, and child care can go a long way in employee happiness.

Inform and Acquire Buy-In Before Rolling Out Technology

It’s human nature to feel threatened by the unknown. One of the best ways to make workers more comfortable with technology is to inform them of upcoming technology-related changes or improvements coming in well in advance. Preferably, you could accompany this with reassurances about how it wouldn’t affect their work. This would make your workers happier and less resistant to changes.

Explain the Benefits of Each New Technology

Technology is taking away some jobs, but it is also creating new possibilities. You can help your employees feel more secure by training them in the use of new technologies and showing them how these new tools can help them be better at – and not be replaced in – their jobs. Consider providing training to help them learn in-house tools or sponsoring educational learning programs externally. Here are a few new technology areas that your employees may learn to embrace with a little explanation and training.

Process Intelligence

Some technologies can directly benefit workers, such as process intelligence. Process intelligence is key to automating and optimizing certain work processes. This reduces employee workload, leaving them free to focus on valuable tasks instead of “grunt” work. Not only will your employees be more engaged, but process intelligence can also improve work efficiency, eliminate errors, and benefit your business’s balance sheet.

ChatGPT

The news of AI generated writing has disrupted a lot of work and educational environments. Your employees may be aware of these developments and both the benefits and risks involved in adopting them. If you choose to embrace ChatGPT, explain to your employees how it can benefit them in their roles.

For example, editors can use it to generate ideas that they then revise, polish, and shape. Or customer service reps can use it to answer difficult questions. By explaining how ChatGPT can help your employees, you will cultivate trust and respect, and your employees will be less likely to reject these new technologies.

Be Proactive for Happier Employees

Regardless of the strides technology has made, employees are indispensable and remain the company’s biggest asset. When they’re feeling left out in the cold, morale suffers, productivity tanks, and turnover rises. Business leaders need to actively value employees more to mitigate these issues. And if you plan to implement new technology, whether it’s using process intelligence or ChatGPT, talk to your employees about why you are adopting them and how they can benefit your entire workforce. The result will be a happier, unified workforce and, consequently, a more productive business. 

Image via Unsplash

EBECON is mainly about the future and history of work, macroeconomics, and global economic developments. If you have any questions, don’t hesitate to reach out!

Email: info@eagle-economist.com

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What caught my eye: Globalization and deglobalization, automation of jobs, future-proof payments, and much more…

“Is the global economy deglobalizing? And if so, why? And what is next?”, by Pinelopi K. Goldberg and Tristan Reed:

“Monetary policy, demand and supply”, Address by Mr Philip Lowe, Governor of the Reserve Bank of Australia, 5 April 2023:

https://www.bis.org/review/r230405d.htm

“Nobody knows how many jobs will “be automated”: Whatever that even means.“ by Noah Smith:

https://noahpinion.substack.com/p/nobody-knows-how-many-jobs-will-be?

“Andréa M Maechler and Thomas Moser: Swiss payments vision – an ecosystem for future-proof payments”:

https://www.bis.org/review/r230405j.htm

“The state of the global economy: A conversation with US Treasury Undersecretary Jay Shambaugh”

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Travel Tips: Stay on Track When You’re Away

by Charley Sunday, creator of astrongfoundation.net

Those of us that travel often know that it’s difficult to stay on track when we’re off the beaten path. It’s easy to miss our exercise routines, turn our sleep schedule upside down, and get disorganized. But there are ways to offset some of the chaos and keep yourself healthy and happy whether you’re away for a weekend or are across the country for a week-long business retreat.

Acclimate yourself to a new time zone.

If you’re traveling more than a time zone away, you’ll need to acclimate yourself to the location you’re heading to. Ideally, you’ll start by adapting your sleeping schedule at least a few days before you go. Once you arrive, head right into whatever activity makes sense for the current time. If it’s night, go to bed. Arriving at noon? Head to lunch.

Keep your documents organized.

One of the greatest things about the digital age is that you no longer have to carry notebooks full of paper with you when you travel. Instead, make sure that you have access to digital PDFs. In the days before you depart, make sure your important documents are digitized. You can use an online tool in order to split a PDF into separate files. Keep in mind that you will still need important documents like your driver’s license, passport, and, if applicable, COVID travel documents.

Maintain an exercise routine.

When your trip is only a few days, you may not have to worry too much about missing a gym session. But extended travel means finding ways to stay fit. A few options here include walking to your meetings and looking for a hotel or short-term apartment with access to a fitness center.

Keep your healthy mealtime habits.

Breakfast is the most important meal of the day, but you may only have time for the hotel buffet on your way out to an important meeting. This is not the time to raid the pastry rack. bistroMD suggests fueling up on fruit and yogurt parfaits, eggs, or bagels, and save the sweet treats for after-dinner coffee with your crew.

Alleviate stress on the go.

There is no sidestepping the fact that travel is stressful. There are a few things you can do to reduce stress before you head out, such as making a checklist of important things you can’t miss. Another smart tip is to plan ahead and schedule a massage for one of your “off-the-clock” evenings. Make a point to alert your coworkers that you do have plans for some of your downtime so that you don’t get roped into an unnecessary activity just for the sake of filling time.

Traveling for business means staying organized (using PDFs is great for this), but it also means staying active and caring for yourself. When you make smart decisions, such as booking a hotel with an on-site fitness center, signing up for a remote coaching program, and keeping your breakfast plate clean and healthy, you fuel yourself up for a successful trip. You never know when being on point may just get either recognition or the raise you deserve once you get back home.

EBECON is mainly about the future and history of work, macroeconomics, and global economic developments. If you have any questions, don’t hesitate to reach out!

Email: info@eagle-economist.com

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U.S. economy: Gradual cooling of the economy with elevated stress in the financial system

I am still rather pessimistic regarding the coming quarters for the U.S. economy. A recession is increasingly likely. In the fourth quarter of 2022, gross domestic product increased significantly by 2.6 percent (annualized) compared with the previous quarter. However, this growth was also due to a sharp increase in inventories. Business investment and private consumption increased only slightly. This is probably also a consequence of high inflation as well as the monetary policy tightening that began in the spring 2022. The interest rate hikes and the gradually less dynamic economy have had a particularly noticeable impact on housing investment, which has decreased significantly. In my baseline scenario, the U.S. economy will enter a recession this quarter and will start to grow again in the fourth quarter, but with little momentum. In addition to higher interest rates and lower real wages, problems in the banking sector have weighed on the U.S. economy since the collapse of Silicon Valley Bank in mid-March; lending to businesses and households is likely to decline. However, a financial crisis like the one in 2008 seems very unlikely at the moment, also thanks to the rescue measures taken by the U.S. authorities.

Before the turmoil at several U.S. banks, the Purchasing Managers’ Index for services was still in expansionary territory at 53.8 points, but for industry, at 49.3 points, it was just below the threshold of 50 above which increasing production can be expected. Consumer sentiment remained subdued, but improved a little compared with the low point in summer 2022. In contrast, there was still no sign of a turnaround in the housing slump. Against this background, consumer demand will be dampened in the coming quarters. The low unemployment rate of 3.5 percent in March is providing support, but the labor market has started to cool in a gradual way. However, many households are facing real wage losses. In addition, household savings accumulated during the pandemic are increasingly dwindling. In view of the weak momentum in private consumption and higher interest rates, high growth rates are not expected for business investment either.

Economic policy is unlikely to provide a tailwind for the U.S. economy in the current year. By summer 2023, American politicians from both parties must agree on an increase in the debt ceiling. It can be assumed that such a bipartisan compromise will include cuts to social programs, for example. The Inflation Reduction Act, which was passed in the summer of 2022 and is intended to promote investment in renewable energy sources in particular, is spread over ten years and will have only a minor impact on the economy in the individual years. Monetary policy has rapidly become less expansionary over the past year – the U.S. Federal Reserve raised its key interest rates from zero percent at the beginning of 2022 to 4.75 percent most recently. To be sure, inflation has gradually eased as energy and food prices eased in the fall and winter. But core inflation, which excludes energy and food prices, remained at 5.5 percent year-on-year in February, well above the central bank’s average two percent target. Further interest rate hikes are therefore to be expected, even if concerns about the stability of the financial system are likely to reduce the pace of interest rate steps.

All in all, the U.S. economy is likely to grow by only 0.2 percent in the current year because of two quarters with negative growth rates. In 2024, growth rates are likely to be slightly higher at 1.4 percent. Inflation will still be significantly higher in the current year at 4.3 percent, but will fall to 2.2 percent in 2024.

Email: info@eagle-economist.com

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What caught my eye: The Future of the U.S. dollar, R&D spending and innovation, central bank digital currencies, and much more…

Mark Sobel, Senior Advisor at the Central for Strategic and International Studies, on the future of the U.S. dollar and the international monetary system:

Gillian Tett on what she learned from the banking crisis:

https://www.ft.com/content/b0865633-82f2-4a49-ae0e-3bc0d1087a31

“Is Big Tech’s R&D Spending Actually Hurting Innovation in the U.S.?”:

https://www.wsj.com/articles/is-big-techs-r-d-spending-actually-hurting-innovation-in-the-u-s-acfa004e

The Tilburg science hub:

https://tilburgsciencehub.com/

“AI Desperately Needs Global Oversight”:

https://www-wired-com.cdn.ampproject.org/c/s/www.wired.com/story/ai-desperately-needs-global-oversight/amp

“Project Icebreaker proposes a new architecture for cross-border retail CBDCs”:

https://www.riksbank.se/en-gb/press-and-published/notices-and-press-releases/notices/2023/project-icebreaker-proposes-a-new-architecture-for-cross-border-retail-cbdcs/

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