US Economy Cools... Growth Rate Downgraded to 3% Range Due to Omicron and Inflation

[Asia Economy Reporter Seulgina Jo] The spread of the new COVID-19 variant Omicron, soaring inflation, and supply chain disruptions are intertwining and ultimately holding back the US economy. Experts have downgraded the first quarter economic growth forecast by more than 1 percentage point in just three months. They also expect this year's growth rate to be limited to 3.3%.

The Wall Street Journal (WSJ) reported on the 16th (local time) that a recent survey of 69 economic experts on the first quarter US economic growth forecast for this year showed a rate of 3%, which is 1.2 percentage points lower than the 4.2% forecast in October last year. The annual growth forecast for 2022 also fell short at 3.3%, compared to the previous forecast of 3.6%. This is even lower than the 3.7% forecast presented earlier by the World Bank (WB).

WSJ stated, "The combined effects of high inflation, supply chain pressures, and the rapidly spreading Omicron variant have lowered the first quarter growth forecast by more than 1 percentage point," adding, "Due to the spread of Omicron, consumer spending is shrinking, and there are concerns that labor shortages and supply chain pressures will worsen."

In particular, the spread of Omicron is considered a factor that further fuels inflation in the US, which recently hit its highest level in 40 years. As labor shortages intensify, wage increase pressures may grow stronger. In this survey, economic experts predicted that the average hourly wage in June this year will rise by 4.9% compared to a year ago.

Additionally, concerns surrounding the supply chain crisis are darkening economic prospects. China, known as the "world's factory," has recently strengthened lockdown measures for COVID-19 prevention ahead of the Beijing Winter Olympics, so global supply chain bottlenecks are expected to continue for the time being. One in two experts predicted that the supply chain crisis will last at least until the second half of this year. About one-third of experts believed it would continue into 2023 or beyond.

Accordingly, the dilemma for the US central bank, the Federal Reserve (Fed), is expected to deepen. To curb inflation that has surged by as much as 7% compared to a year ago, the Fed needs to accelerate tightening measures such as raising the benchmark interest rate, but it cannot ignore the risk of potentially leading to an economic slowdown. The Fed is expected to raise interest rates at least three times this year. In this survey, two-thirds of experts also expected the Fed to raise rates three times starting with the March Federal Open Market Committee (FOMC) meeting. Previously, in the October survey last year, only 5% of experts anticipated a rate hike in March.

However, experts predicted that the Fed will not be able to raise rates fast enough to catch up with the currently soaring prices. Diane Swonk, Chief Economist at Grant Thornton, pointed out, "The biggest economic risk is that the Fed panics and overshoots by raising rates too sharply."

WSJ reported, "Consumers are struggling with high inflation, and companies are weighing labor shortages and production disruptions," adding, "With the spread of COVID-19, the economic growth outlook for not only the first quarter but also for 2022 is darkening."

This content was produced with the assistance of AI translation services.