A ‘Lost Decade’ for the Economy?

By Yuval Rosenberg

We hope your Wednesday is going well! Here's what we're watching on the fiscal front.

World Bank Warns of ‘Lost Decade’ for Global Economy

Battered by the Covid-19 pandemic, the war in Ukraine and stubbornly high inflation, the global economy risks falling into a severe recession, especially if turmoil in the financial markets snowballs into a crisis, the World Bank says in a new report. Those immediate difficulties are compounding deep-rooted structural problems that threaten to drag on growth for years, leading to what could be a “lost decade” that permanently reduces the global economy’s long-term potential.

“Across the world, a structural growth slowdown is under way: At current trends, the global potential growth rate — the maximum rate at which an economy can grow without igniting inflation — is expected to fall to a three-decade low over the remainder of the 2020s,” the bank says.

The Washington, D.C.-based bank — founded at the 1944 Bretton Woods Conference that provided a blueprint for the post-war international financial order — estimates that the growth rate for the rest of the current decade will be just 2.2% per year, down from the 2.6% rate recorded between 2011 and 2021 and the 3.5% rate recorded between 2001 and 2011.

Ayhan Kose, the deputy chief economist at the World Bank, told the Financial Times that “the golden era of development appears to be coming to an end.” Kose said that the reduction in global growth potential “could be much sharper if another financial crisis erupts, especially if it is accompanied by another global recession.”

Saying that “nearly all the economic forces that drove economic progress are in retreat,” the bank noted that the cost of slower growth is considerable. Among other things, the pace of global poverty reduction will fall, as will investment in green energy infrastructure, making it that much harder to address the growing challenges of climate change. Lower growth also means less job creation and lower wage growth, which the bank says could provide “fertile ground for social tensions” within and between societies. And the growing load of debt around the world, both private and public, will become harder to manage, leading to greater financial stress.

Still, low growth is not inevitable, the bank says, and even small improvements can produce significant payoffs over a decade. That said, changing the current trajectory substantially will require “a Herculean collective policy effort to restore growth in the next decade to the average of the previous one.” The most promising approaches would be to boost labor force participation, especially among older workers and women, and to increase productive investment and trade.

The bank says that if governments work together to improve productivity and expand trade, global economic growth could increase by seven-tenths of a percentage point over the baseline, producing a growth rate of 2.9%. “That would convert an expected slowdown in potential GDP growth into an acceleration,” the bank says.

Another Sign of Cooling as Payroll Growth Softens

Following yesterday’s government report showing that the number of U.S. job openings has fallen below 10 million for the first time in nearly two years, Wednesday brought a bit more data suggesting that the economy is cooling. Factory orders fell for a second straight month in February, according to the Commerce Department, and payroll processing firm ADP reported that private sector hiring slowed last month. Company payrolls rose by 145,000 in March, down from 261,000 in February and short of the 215,000 expected by economists surveyed by Reuters.

CNBC’s Jeff Cox notes that the latest ADP report left first-quarter hiring averaging 175,000 jobs a month, down from 216,000 in the fourth quarter and 397,000 over the first quarter of 2022. "Our March payroll data is one of several signals that the economy is slowing," said Nela Richardson, chief economist at ADP. "Employers are pulling back from a year of strong hiring and pay growth, after a three-month plateau, is inching down."

The Labor Department’s jobs report for March is due out Friday morning, and the ADP numbers have not been a reliable predictor of the more comprehensive government data. Economists expect nonfarm payrolls to have increased by 240,000 jobs in the Friday report, down from 311,000 in February, with the unemployment rate holding steady at 3.6%.

Number of the Day: $585 Million

The Biden administration announced Wednesday that it is directing nearly $585 million toward water infrastructure projects. The funds were provided through the $1.2 trillion Infrastructure Investment and Jobs Act of 2021, also known as the Bipartisan Infrastructure Law, which includes $550 billion for new investments for the nation's bridges, airports, waterways and public transit.

“Among the 83 projects selected for funding are efforts to increase canal capacity, provide water treatment for Tribes, replace equipment for hydropower production and provide necessary maintenance to aging project buildings,” the Department of the Interior said in a statement. “Projects will be funded in Arizona, California, Colorado, Idaho, Montana, Nevada, New Mexico, North Dakota, Oregon, South Dakota and Washington.”

The largest single project to receive funding is in California, where the Trinity River Fish Hatchery will spend nearly $66 million to replace pipes, upgrade water filters and improve control systems.

Chart of the Day: Excess Savings

Bolstered by exceptionally large emergency support payments, U.S. household savings grew by more than $2.2 trillion during the Covid-19 pandemic. Those “excess savings” are being spent down, and according to researchers at JPMorgan, they will be depleted by June or thereabouts. That could help relieve some of the inflationary pressure still percolating through the economy, but could also leave workers in a more vulnerable position if the economy slides into a recession later this year, as many analysts expect.

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