At a moment when, coming at the invitation of the president of the Federal Reserve, Jay Powell, the international economic leaders and the economists gather at Jackson Hole, uncertainties about the evolution of the world economy during the end of the year have increased. The progressive discharge of the effects of the Covid-19, the mastering of the fossil fuels flows affected by the invasion of Ukraine by Russia and the stabilization of the relationship between the United States and China have not been enough to reestablish a trust climate, indispensable for the return to growth in the developed countries as in the major emerging ones.
In the U.S., after a GDP increase in 2022 of 2.1%, growth would not be over 1% in 2023 and 2024.Unemployment rate remains at a very low level (3.5%), which generates tensions on production capacities but not yet wages rapid rise despite the tough negotiations, as in the car industry. Their increases, as an average, have slightly overpassed 4% for a year. Inflation is clearly less high (3,2%) than in Europe thanks to the country autonomy in fossil fuels flows which protects it from the fluctuations which have elsewhere affected the natural gas and power prices. But the public and foreign trade deficits remain huge. Federal debt is over 100% of the GDP and the trade deficit for these last twelve months was near 900 billion dollars.
The economic policy is plenty of contradictions. The State has obtained the adoption by the Congress of rebounding measures with a Keynesian inspiration, under the idea of re-industrializing the country and reducing its foreign dependance, notably regarding China with a 500 billion dollars infrastructures program on five years, with the Inflation Reduction Act which contains 1500 billion dollars whose more than 100 billion have been attributed and with the Chips Act, with 280 billion on ten years. But, in the same time, the Federal Reserve was following a restrictive policy through massive interest rates increases which now are near 5% along with accepting to increase the size of its balance sheet which has reached 9 000 billion dollars.
One of the major points which will be treated at Jackson hole will be the position of Jay Powell in presence of these contradictions. How can he lead a restrictive monetary policy and proceed to new rates increases to bring back inflation under 2% with, in the same time such an expansionist budget policy with all the consequences it means for the American debt charges?
China comes also into an uncertainty period, even if the situation of the country is less worrying that what we hear. Comments are essentially about the ability of the country to reach the growth target of 5% fixed by the government. The results of the last four quarters (+3.2%, +0.5%, +2.2% and +0.8%) allow to thinking that China will be near that target. In comparison with the developed countries, it is not so bad. Inflation, inferior to 2%, is seen by the Western observers as a deflation threat when, in their countries, efforts are made to precisely bring back inflation under 2%.
China today is not any more the China of ten years ago and to compare growth rates doesn’t make sense. It remains that, as in every developed country which has reached some development level, sectorial crisis can occur. It is the case with real estate. That harms the behavior of consumers which have increased their savings to the detriment of consumption and so of growth.
Japan is in a different situation because it has broken off with a long period of nil growth and inflation. GDP growth would be over 1% in 2023 and 2024 when the last published figures regarding prices increase are fluctuating between 2 and 3%, according to the chosen definition. Public deficit remains above 5% of the GDP and public indebtedness above 250%. Yet, the Japan Central Bank, to the difference with its Western homologues, doesn’t consider to increase its interest rates.
In Europe the good pupils which was Germany finds itself in big difficulties due to its bad energetic choices. The abandon of nuclear and the putting of the country under the dependance of the Russian natural gas had heavy consequences. The country fell back into recession and nothing allows to thinking that the situation will rebound in 2024 because it has to cope with a growing demographic deficit in an inflationist context, few favorable to the purchasing power. To the opposite, Spain will know in 2023 a growth above 2% with an inflation rate among the lowest in the euro zone. Italy was expecting a rebound this year but the poor figures of the 2nd quarter (-0.3%) and the persistence of an inflation superior to 6% make us to doubt about a positive contribution of the country to the euro zone economy. United Kingdom is still affected by the consequences of the Brexit with an inflation above 6% but the likely recession announced at the end of last year could be avoided.
And what about France? It is in the average with a 2023 growth rate of 1% and similar prospects for 2024. Inflation is lower than in Germany but unemployment remains high, even if there is a slight diminution. The twin deficit, foreign exchanges and public finances, needs a change of the orientation of the economic policy. But the lack of absolute majority at the National Assembly is a weakness factor at a moment when sometimes unpopular decisions must be taken. That has not been ignored by the rating agency Fitch which has downgraded the notation of the country.
Such is the context, marked by the diversity of the situations, in which the Jackson Hole discussions will occur. The central banks action is based on a common principle: the increase of the interest rates allows to slowing demand which reduces inflation and can bring it back to the level adopted in their mandates. But that principle is far from being applied everywhere. In the U.S., the basic rates are near 5% when inflation becomes closer to 3%. The real interest rate is so positive and the growth is low. But the issue is about new increases.
In Japan, despite an inflation and a growth rate superior to what has been observed these last years, it is out of question to proceed to rates increases. In China, with a high growth rate compared to the other countries and a very low inflation, it is obviously not on the agenda to adopt a restrictive policy and the action of the Central Bank will be much more focused on the protection of the sectors in difficulties as the real estate than by macroeconomic considerations.
It is in Europe that the choices would be the most difficult to make. Inflation is by far above the 2% included in the mandate and, to the difference of the United States, real interest rates are still by large negative. Increases would so be essential. But the first economy of the euro zone is in a recession and the other economies know only a modest rebound. How then to justify restrictive measures in such a harmed economic context?
The main factor which weight on an economy is uncertainty. It dissuades enterprises to invest and encourage household to increase their precautionary savings, which weight on growth. Economic leaders who are gathering in Jackson Hole will have to clarify their future actions and to remove the uncertainties, but that will be difficult due to the diversity of the situations and to the contradictions which are resulting from it.