The outbreak of the COVID pandemic has created chaos over the past two years. But some of the after-effects continue to linger for the economy. High inflation, high sovereign debt levels, and endemic COVID cases and variant disruptions have remained persistent parts of the economic landscape. But what comes next? Looking to the months ahead, addressing these lingering risks will be critical for the U.S. economy—and the outlook for material handling.
Inflation rates are high. In fact, inflationary pressures in late 2021 surged to the highest levels since 1982. The pace of inflation rose sharply due to a year-on-year base effect. But that was nowhere near the entire story. High month-on-month consumer price increases were also critical factors supporting inflation in 2021. Plus, the factors behind monthly inflation were significant and varied, including strong U.S. and global goods demand, limited production capacity and extensive supply chain issues. Inflation has remained high due to lingering supply chain tightness and a tight labor market.
Looking at the months ahead, year-on-year inflationary pressures are likely to ease. A tightening of monetary policy and Fed hikes in interest rates are likely to take some of the froth out of inflation. This should also greatly reduce risks that year-on-year inflation rates will accelerate further. But higher interest rates could also slow economic and business activity significantly. Fortunately, U.S. growth and business activity in 2021 were very strong and the labor market recovered swiftly. This provides tailwinds for economic activity this year, even as higher interest rates threaten to engender headwinds.
The Fed is very well aware of these downside risks to growth and financial markets. The implication is that tighter monetary policies that reduce inflation are likely to be gradually implemented to reduce the chance of equity market, bond market and real estate market crashes. The Fed has often struggled when balancing these risks in the past, and we can only hope the Fed gets it right this time. While the Fed takes a measured approach to interest rates to preserve wealth and growth, high inflation is likely to linger.
Record debt levels and interest rates
Global debt levels surged in the wake of COVID and, like inflation, they continue to linger. In advanced economies, emerging market economies and in low income developing economies, sovereign debt levels almost universally reached new all-time dollar levels. Even worse, for most countries, the high debt levels pushed debt-to-GDP ratios to new records for the global economy as well as for most nations.
With lingering high debt levels, the prospects of higher interest rates (due to the aforementioned high inflation) threaten to become a burden on government budgets. This is a risk in the United States and advanced economies, but it is a far larger risk for emerging markets (EMs) and low income developing countries (LIDCs). The reason is tied to the value of capital stock in the EM and LIDC economies.