As 2022 draws to an end, it is easy to see a consistent pattern among leading economists. This year, warnings and alarms have been abundant. The early "doom scenarios" brought to the table by the Deutsche Bank quickly found defenders within the U.S.
One of the steepest warnings this year came from Roger Ferguson, a former vice chairman of the Federal Reserve. During an interview with CNBC, he described recession as "at this stage, almost inevitable" for 2023.
About Roger Ferguson
Roger W. Ferguson Jr. is no mere backup singer in a large choir. With a Ph.D. in Economics, he served on the Federal Reserve's Board of Governors for nine years. He is also a distinguished fellow at the Council of Foreign Relations and holds key positions for Alphabet, Inc (best known as Google).
Vice chairman of the Business Council and Swiss Re American Holding Corporation.
In short, he should be considered one of the key tenors in today's macroeconomics scene, which imbues his statements with all the more gravitas.
So what does he say about our economic prospects for the coming years? So far, nothing too optimistic. For him, the base definition of recession – two consecutive quarters of negative GDP – would be "a win, quite frankly."
Why is Ferguson's Outlook Gloomy?
During his CNBC interview, he described three reasons for his concerns.
1. Worldwide supply issues
An ongoing war that has severely impaired our fuel, natural gas, and fertilizer production to critical levels, alongside ongoing turmoil in several key manufacturing regions, has severely inflated commodity prices worldwide.
Throughout the first half of 2022, rising inflation has occupied most economic headlines. According to Ferguson, these shortages have created a dilemma for most developed countries. "They can't control supply. And we've seen how volatile supply can be."
2. Side effects from anti-inflation tools
Both the U.S. Federal Reserve and its European peers have no choice but to attempt to curb inflation under control. In a vacuum, this is the correct course of action. Ferguson adds, "They have no choice. They have to maintain credibility, which to this date they have done reasonably well."
So, where does the problem come from? In a free market system, central banks and regulatory agencies have limited leeway when controlling inflation.
Ferguson explains that agencies such as the FED "don't control supply. And their tool is a crude one: all they can do is control aggregate demand." But tamping down demand is merely a stop-gap measure, as there are no signs of increased supply or better efficiency in global supply chains. And by hammering down on demand, they will eventually create serious damage to the economy.
3. A global "slowing down"
In the current hyper-connected economy, one nation can't isolate itself from events in other countries. We are seeing the economy slowing down worldwide, which contracts the available market for exports and other expansion opportunities.
"The rest of the world is also slowing pretty dramatically. And we saw (the effects of) that here with the net export numbers, which were much weaker than expected. It is really a tricky global situation."
The Bottom Line: Global Dynamics Make for a Witches' Brew
Ultimately, some of the dynamics that will shape the American economy fall outside of the Federal Reserve or the Central Banks across Europe. The uncertainty about oil prices, new lockdowns across China, and the FED's own limited powers have created what Ferguson deems "a Witch's Brew."
His parting message? Throughout 2023, "it will be a tightrope, and I do fear a likely recession, but I am hoping for a mild one."
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