The specter of recession loomed over the American economy during the year 2023, which is about to end, due to the rise in inflation rates and the rapid increase in American interest rates, but at the end of the year, economic policymakers in the United States tried to adjust the course by revealing plans to reduce inflation next year, and ending the cycle. Monetary tightening.
The US Federal Reserve sought to achieve a “soft landing” by reducing inflation by calming the pace of economic growth without causing it to slide into recession.
- Soft landing is a term used in economics to describe a slowdown in economic expansion without leading to an economic recession.
- A soft landing occurs when an economy is able to shift from a high growth rate to a lower growth rate, without causing the economy to contract or cause a recession.
- A soft landing is usually a desirable goal of economic policy, as manufacturers and consumers seek to avoid sharp economic fluctuations and large changes in economic growth rates.
- Achieving a soft landing means that economic expansion slows gradually without major shocks.
US Treasury Secretary Janet Yellen said on December 1 that she believes that the US economy does not need a further strict tightening of monetary policy to eliminate inflationary expectations and that it is on the right path to achieve a “soft landing.”
She added that there are very good signs that indicate that the country will achieve this smooth landing, which are:
- Unemployment rates stabilize
- Slowing growth to a sustainable level.
- Inflation has now fallen significantly, with prices of some goods returning to pre-pandemic levels.
- Now wage gains actually translate into greater real income.
Last November, Lisa Cook, one of the Federal Reserve Governors, said at a conference that the US central bank may be on its way to reducing inflation while avoiding an economic recession, stressing that a soft landing is possible, with continued low inflation and a strong labor market, but this is not guaranteed. She stressed that monetary policy makers are seeking, through a soft landing, to return inflation to 2 percent levels.
Will the expected interest rate cut succeed in halting the deterioration of the global economy?
Smooth landing
In an article published by the British newspaper “Financial Times”, Rebecca Patterson wrote: “The last US monetary policy meeting for the year 2023 reinforced the agreed-upon expectations of a smooth decline for the country’s economy next year. This is a moderate scenario, with inflation falling towards the Federal Reserve’s target of 2 percent.” Without material damage to the labor market, it will be a historical exception, and there are many things that depend on it.”
She continued: “Let us take US stocks for example: Investors are now ruling out that the Federal Reserve is capable of cutting interest rates by about 1.5 percentage points, starting in early March, which would help drive earnings growth of 10 percent next year in companies included in the index.” Standard & Poor’s 500.
The list of potential triggers for next year’s corrections is daunting. It includes major and sudden policy shifts around key elections; The contagion of conflicts around the world; and unexpected technology-related setbacks.
Four questions
Given the challenge of trying to understand and measure such a wide range of risks, we must prioritize. In the case of a US soft landing, there are at least four factors to start with. It is clear that its resolution will affect the market’s performance in the coming year, as the author monitors as follows:
- The first factor is “consumption,” given its dominant role in driving growth in the United States. In this case, “correct” moderation in spending is required.
- The second factor is related to how the US labor market returns to normal? Even if there is a moderate moderation in consumer activity, a soft landing would also require lowering wage inflation without significant job losses.
- Aside from jobs and consumption, another force that will influence the chances of a soft landing is commodities. Recent years have demonstrated the enormous impact that commodity price changes can have on broader inflation.
- There is a final factor that is often overlooked, and it lies outside the United States, in China. Beijing’s economic challenges and policy responses have helped the Fed so far. China has launched multiple rounds of monetary and fiscal stimulus. So far, these measures have increased supply more than demand, increasing the risk of deflation in China.
This also contributed to US import prices contracting year-on-year throughout 2023, following significant price increases in 2021-2022. About 16.5 percent of total US imports last year came from China. Prices for US imports from China fell by 2.9 percent year-on-year in November. Soft landing enthusiasts in the US may hope that Chinese demand does not recover too much, too quickly.
Mission success
For his part, the Executive Director of VI Markets, Ahmed Moati, explained in an interview with “Iqtisad Sky News Arabia” website, that economic policy makers in the United States may be able to direct the country’s economy towards a soft landing during the new year, and thus not enter into a recession.
He stressed that all official data are clear and indicate that the American economy will not enter a state of recession, while it will enter a soft decline, inferring this scenario expected in 2024 for several reasons: Which:
The latest official data announced an increase in the gross domestic product to 4.9 percent in the third quarter, and at the same time there is strength in jobs, as the employment index in the non-agricultural sector had added more than 190 thousand jobs, and growth rates of 3.7 percent are a good indicator, and this is what he stressed. The American President in a recent meeting, when he pointed out that his country’s economy is strong and that he was able during his administration, despite what the world is going through, to maintain the country’s economic situation and not reach a state of recession.
The US Bureau of Economic Analysis revised the GDP growth of the world’s largest economy down to 4.9 percent on an annual basis during the third quarter.
Moati stressed that the recession scenario has faded because the level of employment is strong, and growth is also high, after relying on artificial intelligence and new technology, and oil production has also risen to become the highest production in the history of the United States and the world, reaching 13 million barrels per day.
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Challenges
Moati stated that the American economy may face some potential challenges during the new year that could hinder achieving a soft landing, which are:
- Increasing cases of bankruptcies, which are approaching 2008 levels, and the mortgage crisis, which is a major crisis and represents the worst scenario that could occur if economic policymakers in the United States continue to tighten monetary policy for a longer period, which will lead to greater bankruptcies.
- Exceeding debt levels and reaching $33 trillion, which is higher than the gross domestic product by about 100.29 percent and represents a danger rate, especially since at the same time there is a budget deficit exceeding 6 percent, so the United States is threatened with declaring bankruptcy from time to time.
Last September, the US Treasury Department announced that the size of the US public debt had reached a record high, having exceeded $33 trillion.
According to US Treasury Department data, the total volume of US foreign debt reached $33.044 trillion.
In addition to this, there are also military challenges through the United States continuing to support wars by supporting Israel in its war in Gaza and at the same time supporting Ukraine. In addition, with the rise in risks in the Red Sea, it began sending warships, which represents pressure on the American budget, according to Maati.
Since 2014, the United States has allocated more than $27 billion in security assistance to Ukraine and more than $24.2 billion since the beginning of Russia’s special military operation in Ukraine on February 24, 2022.
Shocks may hinder achieving a soft landing
The economist, Dr. Ali Al-Idrissi, also said in exclusive statements to the “Eqtisad Sky News Arabia” website that the year 2024 may witness the beginning of a significant decline in the inflation rate in the United States and a reduction in interest rates, especially since the US Federal Reserve’s expectations are heading towards that unless a crisis occurs. Or a new economic shock.
He stressed that the shocks that would hinder a soft landing in the United States, such as the development of the Russian-Ukrainian crisis, for example, or the Israeli escalation in Gaza, pointed out that these are developments that would affect the economy in general, the American economy in particular, and the economic policies in the country.
He stated that the bet on a soft decline depends on lowering the interest rate more than once, as with each lowering of the interest rate there is a further decline in inflation, in light of the continuation of productive policies and the provision of incentives, especially since the interest rate is competitive and capable of attracting huge capital, thus helping to control On inflation.
He continued: Economic policymakers in the United States have great determination to confront inflation, which is reflected in fixing interest rates for a period to control inflation and then reducing them in the coming period.
The US Federal Reserve had fixed interest rates unchanged, for the third time in a row this year, to remain at a level ranging between 5.25 and 5.5 percent, which is the highest in 22 years.
The Federal Reserve indicated in new economic forecasts that the historic tightening of US monetary policy has come to an end, and that borrowing costs will decline in 2024, as it expected a decline of 75 basis points during the new year.
Recession scenario
Ali Al-Idrissi stressed that it is not possible to be certain that the recession scenario has faded, as economic shocks around the world are still affecting the American economy, in addition to the state of uncertainty that affects investment and investors. He expects a gradual improvement, but it will not eliminate the recession completely, and that this matter needs to be addressed. Time to correct it, get rid of inflation, and bring it to acceptable rates.
In November, the inflation rate in America, according to the personal consumption expenditures price index, reached 2.6 percent, down from 2.9 percent in October, which strengthened market expectations regarding a reduction in interest rates in the United States next March.
Excluding the volatile food and energy components, the core personal consumption expenditures price index rose 3.2 percent year-on-year in November, the smallest rise since April 2021.
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2023-12-29 18:49:30
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