High inflation levels far above the Fed Reserve’s target of 2% and the consequent tightening of monetary policy, which has been hiked eight times from January 2022 to February 2023, will continue to dampen household spending and investments in the US, which will negatively impact the economic growth prospects. As a result, the real GDP growth of the US is set to slow down from 2.1% in 2022 to 0.3% in 2023, forecasts GlobalData, a leading data and analytics company.
GlobalData’s latest report, “Macroeconomic Outlook Report: United States,” reveals that the real household consumption expenditure increased by 2.4% in 2022 and is forecast to grow at a slower pace of 0.6% in 2023. Furthermore, with a slowdown in overall domestic production, the overall labor demand and wage growth are also expected to be impacted.
Bindi Patel, Economic Research Analyst at GlobalData, comments: “As the Federal Reserve continues to implement tighter monetary policy, the US economy is likely to experience high-interest rates for mortgages, credit cards, student debt, and car loans. Moreover, business loans will get costly as borrowing costs rise. In addition, with the high levels of interest rates in the US eventually leading to an overall decrease in consumer demand, and stifling economic growth, businesses could impose a hiring freeze.”
GlobalData estimates financial intermediation, real estate and business activities contributed 34.3% towards the gross value added (GVA), followed by wholesale, retail, hotels (15%), and mining, manufacturing and utilities (14.1%). The three sectors are forecast to grow by 5.4%, 5.9%, and 5.6%, respectively, in 2023.
In November 2021, President Joe Biden signed $1 trillion bipartisan infrastructure bill into law. The plan aims to invest more than $550 billion towards transportation, broadband and utilities. These investments are expected to significantly boost construction activities, which GlobalData forecasts to expand by 4.5% during 2023 to 2025.
The inflation rate in the US increased from 4.7% in 2021 to 7.8% in 2022, according to GlobalData estimates. Although the overall inflationary pressure eased for the sixth straight month to 6.5% in December 2022, prices of food (10.4%) and energy services (15.6%) continue to remain at above 10%.
GlobalData forecasts the inflation rate to ease to 3.7% in 2023. In August 2022, President Joe Biden signed the Inflation Reduction Act, which would lead to investments amounting to billions of dollars into programs that would help towards speeding up the clean energy transition, reduce the deficit and curb inflationary pressure.
The US is categorized as a very low-risk nation and ranked seventh out of 153 nations in GlobalData Country Risk Index (GCRI Q3 2022). The country’s risk score is lower in the parameters of macroeconomic, demographic, and social parameters, technology and infrastructure risk parameters when compared to the average of North American nations.
Patel concludes: “There is a growing consensus among the Fed policymakers to further increase the interest rate, as tightening monetary policy continues to be the need of the hour to bring down the elevated inflation levels. Moreover, the government needs to keep a close watch on spending measures to bring down the soaring debt levels.”