By the end of 2023 the American economy will be climbing out of its mild recession. As the recovery begins, will costly plans to re-engineer its industrial landscape be seen as a clever strategy or a hubristic mistake?
By Simon Rabinovitch: US economics editor, The Economist, Washington, DCthe bad news: America is heading for a recession in 2023. Over the past half-century, whenever inflation has reached an annual pace of more than 5%, it has always taken a recession to wring it out of the economy . The current episode of inflation will be no different. Only when growth truly goes negative will America be able to contain its rampant price pressures.
The proximate cause of the recession will be the Federal Reserve, which is set to continue tightening monetary policy in 2023. In September 2022 the median forecast of Fed officials was that they would raise interest rates to a floor of 4.6% in 2023, up from 3% now. But inflation will still be frustratingly persistent early in the new year, so they will probably go beyond that, taking rates up to about 5%.
The picture for the American economy will change markedly over the course of 2023. Disinflation will eventually take hold, turning into outright month-on-month deflation when the recession strikes. That ought to spell the end of the Fed’s rate-increase cycle by the middle of the year, with the focus instead shifting to when it might start to loosen policy. The Fed will be in no haste to make big rate cuts, having fought so hard to rein in prices.
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