The Economic Shrink in 2022
Photo by In the first quarter of 2022, the US economy suddenly shrunk by 1.4%, a sharp downturn following the 6.9% annual rate the economy grew at in the final quarter of 2021. However, despite this downward trend, it is possible that previous growth will make a comeback.
Unfortunately, expansion of the economy has been stunted when it recently came out that the Gross Domestic Product, or GDP—a measure of economy size—fell at a 1.4% annualized rate, disappointing the forecast of a 1.1% rising rate that has been polled by Reuters. Following the trend, the World Bank and the International Monetary Fund (IMF) have recently lowered their expectations for global economic growth in 2022, with the IMF's projections dropping from 4.4% to 3.6%. Similarly, the Bank now forecasts only a 3.2% growth in 2022, down from its previous estimate of 4.1%. The explanation? Several things.
The trade deficit with China that has been ongoing since the beginning of the COVID pandemic was a huge hit on the world economy, despite being a “behind the scenes” actor. In January and February 2020, Chinese exports declined by 17% amid the economic disruption caused by the global pandemic. The US relies heavily on China for imports—the pandemic alone has caused them to rise by nearly 20% percent as Americans splurged heavily on foreign products. Exports fell by almost 6%, widening the trade deficit to record highs. This subtracted over 3 percentage points from the GDP. While this seems small from a numerical standpoint, it’s caused great harm economically to a wide sector of Americans.
With the trade deficit came the slowed restocking of goods — as businesses stocked their inventories aggressively for last year’s holiday season in fear of supply shortages, they started off 2022 with less restocking than they normally would plus a 0.8% lower GDP.
Even worse, the slowing GDP is accompanied by the recent inflation that came with the Russia-Ukraine war. Gas and food prices have spiked, with prices jumping 8.5% from the previous year — marking the fastest rise in four decades. A possible recession from the slowing GDP and the ever-growing inflation signals potential stagflation- meaning that there is high inflation, high unemployment, or negative economic growth.
Concerns about this are understandable; there are enough signs to show that stagflation—persistently high inflation accompanied with high unemployment and stagnating demand is a possible problem in the future. However, it is likely that the economy will be able to endure. Rising wages supported the high expenses households had and higher profits in companies led to more investment. Even better, there have been plans to raise interest rates in order to fight inflation. While the horizons are still murky, the “soft landing” that the Fed is hoping for is not out of the question yet.
