The Federal Reserve’s Plan To Combat Inflation By Raising Interest Rates Carries The Risk of A Recession

A woman shops for chicken at a supermarket in Santa Monica, California, on September 13.Apu Gomes/AFP via Getty Images 

The last year of inflation has disproportionately hurt low-income and nonwhite families — those with the least flexibility in their monthly budgets to absorb higher prices. Now those same groups could be hurt by economic policymakers’ plan to tackle inflation through interest rate hikes, and in potentially longer-lasting ways.

Last month, leaders at the Federal Reserve predicted that, given their plans to continue raising rates, unemployment would rise from 3.7 percent (or 6 million people) to 4.4 percent by the end of 2023. In plain terms, this means an additional 1.2 million people would lose their jobs over the 15-month period. “I wish there was a painless way to do that,” Federal Reserve Chair Jay Powell had said. “There isn’t.”

Other financial analysts projected even higher unemployment to result. Bank of America predicted unemployment would reach 5.6 percent by the end of 2023, translating to 3.2 million more people out of their jobs. Researchers at the International Monetary Fund (IMF) said in September that unemployment may need to reach as high as 7.5 percent to curb inflation, which would mean roughly 6 million people losing work.

The Federal Reserve raises interest rates to slow down consumption across the economy: As the cost of borrowing rises, the hope is that people buy fewer things, and prices stop spiraling higher. The latest data shows inflation still up roughly 8 percent compared to a year ago, and recent reporting in the New York Times suggests Fed leaders may even raise rates more aggressively into 2023 than they had previously envisioned.

The question is whether the Federal Reserve will be able to hit the brakes when they decide they’ve done enough — or whether it will be too late, and the economy will be hurtling downhill toward a recession that the Fed created but can’t control.

“One thing that’s a very open debate and a very important subtext to all the fights is the question of whether the Fed can actually increase unemployment just a little,” said Mike Konczal, the director of Macroeconomic Analysis at the Roosevelt Institute, a left-leaning think tank. “And with every million who lose their jobs, it’s that much harder to reintegrate them [into the labor force] later on.”

Stabilizing the economy, Konczal said, is like mending a garment. “You can pull at the threads, but if it tears you can’t just push it all back,” he said. “That’s certainly what keeps me very nervous, that the Fed is so worried it underreacted last year [to inflation] that now it might overreact.”

Some economic experts and journalists are asking if the current pain of inflation outweighs the suffering of a potential recession, and if there are less blunt tools the federal government could be leveraging instead.

“To have a smaller paycheck due to inflation, is that really worse than having no paycheck at all?” Today, Explained host Noel King asked Minneapolis Fed President Neel Kashkari last week. “There’s not an easy answer,” Kashkari acknowledged, ultimately arguing that unemployment affects fewer people than inflation, and it’s easier for the government to target assistance to those who might be hurt.

But higher unemployment and recessions don’t just affect those who lose their jobs, and the assumption that the government would be willing or even able to provide targeted assistance to those pushed out of the labor market beyond the maximum six months of traditional (and relatively meager) unemployment benefits seems highly uncertain, given how Democrats’ more generous pandemic stimulus policies have been blamed for contributing to inflation in the first place.

Experts say the country still lacks the infrastructure to deliver more targeted aid, and with Democrats barely even mounting a defense of their pandemic assistance, whether there’s political oxygen — let alone technological capacity — to help those in a recession remains unclear.

On top of all this, if rate hikes do push millions more people out of work, those who would likely bear the biggest brunt of that job loss and take the longest to recover are the same groups suffering most now from inflation: low-income workers, workers with less education, and people of color.

Missing a “soft landing” means millions more people could lose their jobs

The workers who are most vulnerable to near-term layoffs work in construction and mortgage lending, and sell products like TVs and cars. These are so-called “interest-sensitive” industries, particularly responsive to changes in interest rates and borrowing costs. The next hit would be those working in firms that are particularly exposed to financial speculation — like traders and tech companies built around equity valuation.

The Federal Reserve’s goal is to achieve a so-called “soft landing” — meaning they want to lower inflation without throwing the economy into a recession.

Earlier this year Powell, the Fed chair, explained their goal was to make it harder for people to switch jobs, since job-switching and the fierce competition to hire workers were driving up wages. In this scenario, maybe a business eyeing higher interest rates would post fewer new jobs or decide not to fill vacant roles.

Maybe an employee would see the hiring landscape as less friendly and decide to stay put. “The idea is there’s a whole lot of activity happening that we don’t see by just looking at the unemployment rate,” said Konczal, of the Roosevelt Institute. “So in this scenario, where it becomes harder to switch to new jobs, the economy still cools without unemployment going up.”

Konczal says there’s some evidence that Powell’s “soft landing” argument has been bearing out over the past two months — the number of new job openings has slowed, as have the number of workers voluntarily switching to take another job. Wage data expected at the end of October should provide a clearer picture of where things stand.

But many experts are pessimistic that inflation can really come down without driving up unemployment, and say that if the Federal Reserve wants to see a genuine drop in prices it will have to force layoffs in less “interest-sensitive” industries, even if that increases the risk of a recession. Fewer people simply work in interest-sensitive fields like manufacturing than they did decades ago.

“That’s where face-to-face services like hospitality start to take the hit,” said Josh Bivens, the research director at the left-leaning Economic Policy Institute. “Recessions can have big multiplier effects. Layoffs typically start in construction and then radiate onward, and things can get pretty bad if you have a big spiral.”

It’s harder for less educated, low-income, and nonwhite people to find work after layoffs

While some policymakers are trying to figure out if they could reduce inflation while keeping unemployment around 4 or 5 percent, other economists are sounding the alarm on what even this optimistic aggregate figure obscures — the unemployment rate for Black people is generally double that of white people, and for Hispanic people it’s typically 1.5 times the rate.

In one recent study, researchers found that lowering interest rates disproportionately helped the employment prospects for Black workers, women, and those without a high school diploma. It makes sense — if employers are facing increased competition for labor, they may be less likely to discriminate in the hiring process. Relatedly, over the past year, workers with criminal records and workers with disabilities were more in demand than they have been, as employers struggled to fill vacancies.

“It’s just a truism that when bad things happen in an economy, it’s the marginalized people, the people with less power, who are hurt fastest and most,” said Wendy Edelberg, the director of the Hamilton Project, an economics division within the Brookings Institution. “That should be fiscal policymakers’ laser focus, at all times but particularly in a downturn.”

The government is less likely to offer aid to workers who lose their jobs

When the pandemic hit, and millions lost their jobs or had their working hours reduced, the federal government responded with an array of financial policies to ease the pain such as expanded unemployment benefits, three rounds of stimulus checks, rental assistance, monthly cash deposits for parents with kids, hundreds of billions for state and local governments, and subsidies for businesses — big and small.

The investments kept millions out of poverty and evictions below historic averages, and are credited generally with helping the economy rebound much faster than following past downturns, and more quickly than other nations that had less robust stimulus policies.

But now Republicans have latched onto that federal aid as one of the top reasons inflation is at its highest point in four decades. They blame the Biden administration for putting too much money in people’s pockets, allowing them to spend too much and drive up prices. Some argue the American Rescue Plan was simply too big, or not targeted enough to those who really needed help. Economists disagree over how much the pandemic policies are to blame but Democrats, notably, are not touting their investments on the campaign trail, as voters cite inflation as a top election concern.

Republicans are expected to win control of the House, and Republican Leader Kevin McCarthy has for months attacked Democrats’ Covid policies for driving inflation. This raises the question: If the economy does spiral and workers lose their jobs or their workable hours, what kind of assistance might they expect to receive in that scenario?

“It’s one of the reasons I’m so worried about the Fed potentially overshooting, that we just won’t do that much to help people since we’re told that helping people too generously is what got us into this mess,” said Bivens of the Economic Policy Institute. “I think that’s wrong, but I’m still totally worried about this dynamic.” Bivens also warned that if Republicans control Congress, it might be in their interest to prolong economic hardship ahead of the next presidential election.

“If the Fed slips the economy into recession, what kinds of tools and political capital will be available? That’s a real concern that we aren’t talking about and aren’t being honest with ourselves,” said Mark Paul, an economist at Rutgers who has argued raising rates is the wrong response to the inflation crisis. “In the pandemic, policymakers reacted in a far better way than they have in our lifetime, where, rather than the economy taking 10 years to get to pre-Covid levels, it essentially took 1.5 years. The narrative now is that the government overshot, but the question is what were the other options and what would those have led to?”

Edelberg of the Hamilton Project said if there is a downturn, she hopes we can get “targeted relief” to those most in crisis, so that it only has modest effects on inflation. “We should do that with eyes wide open — knowing it will boost aggregate demand a little bit and that will be okay because a policy should have more than one objective,” she said.

Edelberg acknowledged the country isn’t exactly positioned to distribute targeted relief — the nation’s unemployment insurance system remains in need of serious upgrades. “We should be improving the system so we can find the people who need to get the money, so we don’t need to do things like send checks to everyone,” she said. “We do not have that infrastructure now because we haven’t really valued it.”

Slow wage growth affects even those who keep their jobs

It took 10 years after the Great Recession for wages to finally start rising, long after unemployment had gone back down. Part of this was fueled by state and local minimum wage increases, but part of it, experts believe, was due to a finally tightening economy.

Workers have enjoyed increased power over the past two years amid the even tighter post-pandemic labor market. Wages have gone up, especially for workers at the lower end of the income spectrum, and especially among those who switched their jobs. In 2021, wages grew by 4.5 percent on average, the fastest rate in almost four decades.

Now that we’re finally seeing broad-based gains in the economy, progressive economists warn that aggressive Fed policy could make those raises disappear. One major risk of a recession is slowed wage growth, which can impact everyone, not just those who lose their jobs. Even modest economic downturns can significantly reduce the chance of employers handing out raises.

The Federal Reserve has been explicit that its goal is to reach 2 percent inflation — meaning prices would continue to rise in that scenario, just hopefully more slowly and predictably. But if wages are not also rising, then families will still feel worse off and struggle to afford basic necessities.

“This wage growth angle is, by far, the most important reason why just looking at the rise of unemployment in a recession is a radical understatement of how many workers are adversely affected by recessions,” Bivens wrote in July.

One big fear for inflation watchers is the risk of a so-called “wage spiral” — a scenario where wage increases cause price increases, which in turn cause more wage increases. The concern isn’t baseless; wage spirals have happened before, most notably in the US in the 1970s, but it’s certainly not an inevitability. The labor movement was also much stronger four decades ago — over a third were unionized compared to 6 percent of private sector workers today — giving workers the kind of bargaining power they simply lack now.

Fears of a wage spiral have been dissipating somewhat. Wage growth is still higher than pre-Covid levels but has been slowing down this year. Earlier this month, researchers with the IMF concluded that wage spiral risks “appear contained” for now.

What else could be done?

Some economists and writers have warned that raising interest rates further is unlikely to curb some of the root causes of inflation — such as the war in Ukraine and factory shutdowns — and that inflation would come down next year regardless as supply chains get back on track.Others say more attention should be on things like investigating corporations for raising their prices far beyond the cost increases for raw materials.

The House Subcommittee on Economic and Consumer Policy held a hearing on these concerns in late September, and three Democratic lawmakers introduced a bill in May that would seek to ban price gouging during market disruptions. Dean Baker, an economist at the Center for Economic and Policy Research, pointed to what he called “an extraordinary increase in profit shares in a relatively short period” — rising from 23.9 percent in 2019 to 26 percent in the second quarter of this year.

Some centrist and conservative analysts have framed higher unemployment and a possible recession as simply a necessary if regrettable stage in the life cycle of an economy, almost like a biological reset. “The Fed’s rate hikes will hurt,” said the right-leaning Washington Post editorial board. “That’s unavoidable.”

But “the idea that severe recessions are necessary is absolutely not true,” said Konczal. “That’s the whole point of having a Federal Reserve and macroeconomics. And the idea that recessions are somehow regenerative and healing to the economy is also wrong.”

Whether one needs higher-than-expected unemployment or lower-than-existing GDP to bring down inflation is not really clear. “People are not sure if that’s true,” said Konczal. “It’s a small sample size, and we have only so many economies that you can test.”

Others have argued that fiscal policy — as opposed to the Federal Reserve’s monetary policy — demands more attention to combat inflation. (Fiscal policy refers to a government’s decision to tax and spend, whereas monetary policy is about a central bank’s control over the flow of money and credit.) Fiscal policy can be more targeted, but it can also be difficult to pass through the legislative process, and take far longer to have an economic effect.

For example, Rep. Ro Khanna (D-CA) has called for a “production agenda” that would involve new investments in child care, housing, and community college to bring down prices and train Americans to work. These strategies, if successful, would take years however to trickle out. Sen. Elizabeth Warren (D-MA) similarly argued this past summer that Congress investing in child care would help bring more parents into the workforce, which could counteract inflation, though pouring more money into child care amid a worker shortage, conversely, could also worsen it.

In August, Rep. Jamaal Bowman (D-NY) introduced a bill that would place price controls on utilities, food, and housing, bolster the scope of the White House supply chain disruption task force, and authorize better data collection on corporate profiteering. (Price controls are controversial, and led to soaring prices after they were lifted in the 1970s.)

Paul, the Rutgers economist, helped advise Bowman on his bill and told Vox that he believes the Federal Reserve is not taking seriously its dual congressional mandate for both price stability and maximum employment. “Right now the Fed seems to be focused on price stability at all costs,” Paul said. “Full employment be damned.”

Source: The Federal Reserve’s plan to combat inflation by raising interest rates carries the risk of a recession – Vox

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An Economist Calls For Homeowner Celebration Over High Inflation

Justin Wolfers, a professor of economics at the University of Michigan, recently posted something on Twitter that stirred the collective pot:

“Lemme ask one of those tone deaf economist questions that annoy almost everyone. Today, many families learned that the amount they owe on their mortgage has declined—in real terms—by 9.1% over the past year. Why do we hear so little about this? Why don’t we see folks celebrating?”

Some other economists agreed with him, at least in terms of how people think of economics. Many non-economists quickly came in to explain their thought processes—that the points, while technically correct, were out of context and touch.

Essentially, the critics made two points as accurately as Wolfers and company related the technicalities. People are set upon from all quarters, not just housing. And the U.S. is becoming a country, not of poverty, but entrenched poorness. That is, in the sense of “small in worth” or “less than adequate” by the Merriam-Webster definition.

It is true that as inflation increases, the monetary value of a loan with terms that established lower interest rates decreases in favor of the borrower, at least while inflation is running hot. If the total remaining on the mortgage, including interest and principal, is $X, then over the last year it’s now 9.1% less expensive because the value of the dollars is falling. The mortgage likely has no inflation escalation rider.

Now, that mortgage only remains 9.1% less expensive if there is no deflation. You do get a savings even if inflation drops to a lower rate, because the value of what a dollar can buy continues to drop. As it does pretty much every year anyway. This is one of the advantages of owning a home. The amount you own drops because there is some degree of inflation in virtually every year, as, unless you have an adjustable-rate mortgage (a bad idea in the long run that might make sense in specific circumstances in the immediate future), you’ll locked in at the level of cheaper dollars.

There’s nothing new with that and it’s how a lot of people build wealth over time. Then they, in theory, pass that property down to their children, who now have greater wealth that, in theory, can get passed down in turn, and so on. The growth of wealth becomes a multi-generational process. The longer you’re around, the greater an advantage you have.

There are two other ways you build value as a homeowner. One is, on the whole, there will be some appreciation in value over time. That comes without additional payments. The other is one of those “you get a benefit because you’re not doing something else that would cost more” kind of financial planning arguments. If you don’t own, you’re a renter and the amount you pay climbs each year. If you do own, then there’s an annual additional amount you don’t have to pay, which is a savings.

That doesn’t mean that homeowners don’t pay more every year because there’s more to owning a house than the payment. Taxes, utilities, maintenance and repair, upgrades, and so on see regularly rising costs. Still, this remains a case that things could be much worse, and you are ahead in some significant ways.

So, why aren’t people dancing in the street? The first reason the critics note is that housing, while a significant cost, isn’t the only place where people are hit. For many years, important areas of living have endured significantly higher increases than income in real terms after inflation. Healthcare, childcare, education, energy (both electric and heating and cooling), all drive up everyday expenses. They leave pay increases in the dusty plains of personal financial ledgers. Personal savings rates are dropping; credit card debt has again reached new heights.

One reason you don’t see conga lines in the street is because people are anxious about the economy and their position in it. Consumer sentiment is up a touch from June, as the newest University of Michigan polling shows, but that’s still down massively from a year earlier. If a patient is in bed with a serious illness and a doctor tells them that they don’t have an additional one, they might be glad to hear it and yet not be in a position to leap to their feet.

The second criticism is even stronger, in a social sense. If housing ownership is at about 65% in the country, should people clap for joy as they see a third of the country having to struggle much harder? When many who are not in a position to own homes are their children or nieces and nephews or kids of friends or younger people they work with? You can be thankful that you weren’t part of a massive traffic accident and yet reluctant to outwardly rejoice so as not to rub others’ noses in the dirt.

My credits include Fortune, the Wall Street Journal, the New York Times Magazine, Zenger News, NBC News, CBS Moneywatch, Technology Review, The Fiscal Times, and…

Source: An Economist Calls For Homeowner Celebration Over High Inflation

Related contents:

Sen. Michael Bennet is ready for a difficult election year amid inflation, housing crunch Colorado Public Radio

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23:36 Thu, 14 Jul

Record share of US consumers blame inflation for eroding living standards Anadolu Agency

Inflation rises to 18.60 per cent in June – NBS International Centre for Investigative Reporting

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One In Three Children With Disabilities Experience Violence

Children with disabilities twice as likely to experience any form of violence (physical, emotional, sexual, neglect) than children without disabilities.

Children with disabilities experience a high burden of all forms of violence, according to a systematic review and meta-analysis published online March 17 in The Lancet Child & Adolescent Health.

Zuyi Fang, Ph.D., from the School of Social Development and Public Policy at Beijing Normal University, and colleagues conducted a systematic literature review to estimate violence against children with disabilities. Ninety-eight studies (involving 16.8 million children) were included in the analysis.

The researchers found that the overall prevalence of violence against children with disabilities was 31.7 percent, and the overall odds of children with disabilities experiencing violence was higher than for children without disabilities (odds ratio, 2.08). The estimates varied by the type of violence, disability, and perpetrator.

While there was a high degree of heterogeneity across most estimates, sensitivity analysis suggested a high degree of certainty for these estimates. The included studies were, on average, of medium quality. There was particular vulnerability to experiencing violence among children in economically disadvantaged contexts.

“Our findings reveal unacceptable and alarming rates of violence against children with disabilities that cannot be ignored,” a coauthor said in a statement. “We must urgently invest in services and support that address the factors that place children with disabilities at heightened risk of violence and abuse, including caregiver stress, social isolation, and poverty.”

Screenshot 2022-03-28 at 20-56-37 image.jpg (WEBP Image 210 × 219 pixels)

By: Physician’s Briefing Staff

Source: https://consumer.healthday.com

.

What Is Income-Contingent Repayment?

Income-Contingent Repayment, or ICR, is a repayment plan that bases the loan payments on a percentage of the borrower’s discretionary income, as opposed to the amount owed. ICR first became available in 1993, although it wasn’t used by borrowers until 1994.

ICR is one of four income-driven repayment plans. The others are Income-Based Repayment (IBR), Pay-As-You-Earn Repayment (PAYE) and Revised Pay-As-You-Earn Repayment (REPAYE). ICR generally has the highest monthly student loan payment of the four income-driven repayment plans.

Eligible Loans

ICR is only available for loans in the William D. Ford Federal Direct Loan Program (Direct Loans).

ICR is not available for loans in the Federal Family Education Loan (FFEL) or Federal Perkins Loan programs, although FFEL and Federal Perkins loans can be made eligible by including them in a Federal Direct Consolidation Loan.

Federal Parent PLUS Loans are not directly eligible for any of the income-driven repayment plans. However, if a Federal Parent PLUS Loan entered repayment on or after July 1, 2006 and is included in a Federal Direct Consolidation Loan, the consolidation loan is eligible for ICR but not any of the other income-driven repayment plans.

Loan Payments

Monthly student loan payments in ICR are based on the lower payment calculated using two formulas.

  • The primary formula, which is dominant for most borrowers, is based on 20% of discretionary income. Discretionary income is defined as the amount by which adjusted gross income (AGI) exceeds 100% of the poverty line. This is a larger percentage of discretionary income and a larger definition of discretionary income than the other income-driven repayment plans.
  • The secondary formula is based on the monthly payment under a 12-year level repayment plan multiplied by an income percentage factor (IPF). The IPF is based on the borrower’s AGI and tax filing status. The IPF ranges from slightly more than 50% for low-income borrowers to 200% for high-income borrowers. The IPF is 100% when the AGI is slightly more than $60,000. The IPF is adjusted annually, based on inflation.

ICR does not have a cap on the monthly student loan payments, so the payments will increase as income increases. (The secondary formula does not really function as a cap on the monthly student loan payments because the payment increases as income increases.)

ICR also does not have a marriage penalty. If a married borrower files federal income tax returns as married filing separately, the loan payment under ICR is based on just the borrower’s income. Otherwise, the loan payment will be based on joint income.

The minimum payment under ICR is zero if the calculated payment is zero, otherwise it is $5.

Treatment of Interest

Student loans can be negatively amortized under ICR. This means that the loan payment is less than the new interest that accrues. Any accrued but unpaid interest is capitalized annually, causing the loan balance to increase. Interest capitalization stops when the total capitalized interest reaches 10% of the loan’s original principal balance.

The federal government does not pay any of the interest under ICR, not even on subsidized loans.

Repayment Term and Loan Forgiveness

The maximum repayment term under ICR is 25 years (300 payments). It is the same for borrowers who have undergraduate and graduate loans. Any remaining debt is forgiven after 300 payments are made under ICR, including a calculated zero monthly payment.

If the borrower qualifies for Public Service Loan Forgiveness, the remaining debt is forgiven after 10 years’ worth of payments (120 payments). Assuming an AGI of $30,000, the initial monthly student loan payment in ICR will be about $285 for a family of one and about $58 for a family of four.

This increases to about $619 and $392 for an AGI of $50,000 and to about $952 and $725 for an AGI of $70,000. These payment examples assume a 2022 poverty line of $12,880 for a family of one and $26,500 for a family of four.

I am Publisher of PrivateStudentLoans.guru, a free web site about borrowing to pay for college. I am an expert on student financial aid, the FAFSA, scholarships,

Source: What Is Income-Contingent Repayment?

.

Critics:

By: Ryan Lane

Income-Contingent Repayment costs more each month than other income-driven repayment plans. ICR caps payments at 20% of your discretionary income and lasts 25 years. Still, this plan may be your best income-driven choice in the following instances:

  • You have parent PLUS loans or a consolidation loan that includes parent PLUS loans.

  • You want slightly lower payments to potentially pay less interest.

All income-driven plans share some similarities: Each caps payments to between 10% and 20% of your discretionary income and forgives your remaining loan balance after 20 or 25 years of payments. Use Federal Student Aid’s Loan Simulator to see how much you might pay under different plans.

You must enroll in Income-Contingent Repayment. You can do this by mailing a completed income-driven repayment request to your student loan servicer, but it’s easier to complete the process online. You can change your student loan repayment plan at any time.

• Visit studentaid.gov. Log in with your Federal Student Aid ID, or create an FSA ID if you don’t have one.

• Select income-driven repayment plan request. Preview the form so you know what documents to have ready, like your tax return.

• Choose your plan. If you qualify for more than one income-driven repayment plan, you can be automatically placed in the plan with the lowest payment or specifically choose ICR if it makes the most sense for you.

• Complete the application. Enter the required details about your income and family. Remember to include your spouse’s information, if applicable, as it will affect your payments under ICR.

More contents:

How are income-driven payments calculated?

Income-driven repayment: Is it right for you?

What is income-driven repayment?

Student loan repayment process: Everything you need to know

How to pay off parent PLUS loans

How to get parent PLUS loan forgiveness

What is income-driven repayment?

What is income-driven repayment?

Repaying your student loan

Learn Now, Pay Later: A History of Income-Contingent Student Loans in the United States

Calculate your payment on an ICR plan

How to apply for an ICR plan

Income-Contingent Repayment and student loan forgiveness

Alternatives to an ICR plan

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East Asia’s Economies Face Slowing Growth and Rising Inequality, World Bank Warns

HONG KONG—Most countries in East Asia face major setbacks in recovering from the coronavirus, the World Bank said, adding to concerns that the resurgent pandemic will widen the economic divide between the region and the Western world.

With the notable exception of China, economic activity across the region has sputtered since the second quarter amid outbreaks of the Delta variant of the coronavirus and relatively slow vaccine rollouts, leading some multilateral institutions to cut growth forecasts for most economies in the region and warn about longer-term problems such as rising inequality.

Overall, the economy of East Asia and the Pacific is on track to expand by 7.5% this year, according to forecasts released Tuesday by the World Bank Group, up from its April forecast of 7.4%. But that improvement is all China, now expected to grow 8.5%, up from 8.1%. The outlook for the rest of the region worsened, with the bank now forecasting growth of just 2.5% this year, down from 4.4% in April.

“The economic recovery of developing East Asia and Pacific faces a reversal of fortune,” said Manuela Ferro, an economist at the Washington, D.C.-based institution. The U.S. economy is expected to outpace the world as a whole by expanding 6% this year, the Organization for Economic Cooperation and Development forecast last week.

In Asia, meanwhile, the pandemic’s persistence threatens to deliver “an impoverishing double whammy of slow growth and increasing inequality,” the World Bank warned, calling it the first time the region has faced such an outlook since the turn of the century. The bank sees 24 million more people below the poverty line in Asia this year than it projected earlier.

Last week, the Manila-based Asia Development Bank cut its growth outlook for developing Asia to 7.1%, from 7.3% in April, in large part because Covid-19 outbreaks led to major lockdowns that slowed manufacturing activity in Southeast Asia, a regional export hub. The ADB now forecasts 3.1% growth this year for Southeast Asia, where countries have struggled to ramp up vaccinations, down from 4.4% previously.

Myanmar, Malaysia and Cambodia are among the countries that have imposed lockdowns and social-distancing rules in recent months as Covid-19 infections surged. That has exacerbated global supply-chain disruptions, delaying production of finished goods from clothes to cars as well as commodities, including coffee and palm oil.

Vaccination rates have picked up in Asia, though they still trail the West. As of the end of August, less than one-third of the region’s population had been fully vaccinated, compared with 52% in the U.S. and 58% in the European Union, according to the ADB.

The World Bank predicts that most Asian countries will push vaccination rates up to 60% by the first half of 2022, which it says will allow for a fuller resumption of economic activity—though it won’t be enough to eliminate infections.

Moreover, Asia’s advantage in the global goods trade—a bright spot for the region for much of the past year—is expected to fade.

Export demand for a range of goods, such as machinery and consumer electronics, has slipped as companies and individuals from richer Western countries shift their spending patterns. Supply capacity in those markets has also started to normalize, while higher shipping costs risk further eroding appetite for imports from Asia.

“Global goods import demand peaked in the second quarter of 2020 and regional exports face stronger competitions as other regions recover,” says the World Bank report.

MARKET TRENDS

We have revised our forecast for China’s 2021 growth from 8.4% to 8.2% to account for recent COVID outbreaks and economic underperformance.,China is experiencing a rash of COVID outbreaks driven by the Delta variant. New cases have emerged in cities across the country, such as Nanjing, Ningbo, and Wuhan.,Several indicators signaled a slowdown in July relative to June: industrial value-added growth fell from 8.8% YOY to 8.3% YOY; retail sales growth slowed from 12.1% YOY to 8.5% YOY; urban unemployment rose from 5.0% to 5.1%.

KEY DEVELOPMENTS

Xi Jinping is shifting the government’s focus away from pursuing growth at any cost toward sharing the fruits of growth more evenly across society. This push is reflected in the rising use of the phrase “common prosperity,” which has started to appear frequently in communications across the government, schools, and media.,While the details behind the “common prosperity” push are not yet clear and policy implementation timelines may be extended, the implications of this shift will be wide-ranging.

In the coming years, China’s leadership will show less forbearance to wealthy individuals and large corporations; instead, it will expect them to support its goals for social equality through measures like direct transfers, donations, program development, and tax changes.,China’s regulatory landscape will also shift in favor of industries that are seen to serve lower-income segments and against those seen to serve higher-income segments. For example, companies serving rural and less developed parts of the country are likely to receive a helping hand, while companies selling luxury items and high-end real estate are likely to face increased barriers in the market.

By: Stella Yifan Xie at stella.xie@wsj.com

Source: East Asia’s Economies Face Slowing Growth and Rising Inequality, World Bank Warns – WSJ

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