“Why the United States’ Resilience to Monetary Tightening may be Short-lived”

“Why then is the United States holding up so well in the face of unprecedented monetary tightening? asks Keith Wade, Chief Economist and Strategist at Schroders. The latter recalls that companies have been able to pass on rising costs to prices, so that the compression of profit margins has not yet taken place. Since companies have not been under financial pressure to restructure and reduce jobs, they thus contribute to fueling inflation by participating in the increase in consumer prices.

To understand this resilience of North American growth, Keith Wade considers it necessary to seek to understand why demand remains so vigorous, despite the significant rise in prices. He explains that households have dipped into their excess savings to maintain their purchasing power. According to his calculations, around $800 billion was used to support consumption in 2022 and he expects the savings surplus to continue to decline at a similar pace to 2022.

According to Schroders Chief Economist and Strategist, the starting point for the slowdown in consumer demand will be when households decide to stop tapping into their excess savings. “It would then be enough for consumption to fall by 1% to put pressure on the pricing power of companies and thus weigh on profit margins and cash flow”, he specifies.

Companies would then react by reducing employment, pushing unemployment up, and leading to a decline in consumption, as households become more cautious. The downturn in the economy would then be later in 2023.

Schroders also warns that while monetary policy has yet to show its effects, that doesn’t mean we won’t see them in the future.

This is why the asset manager sees the recession as delayed rather than avoided. If household demand slows as expected, the recession should take place in the second half of the year, or even later. “An easing of monetary policy or a reversal of the Fed should then follow”, concludes Keith Wade.

source : AOF

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