Just as the U.S. economy appeared to be recovering from pandemic-induced shocks, the Russia-Ukraine war has injected a sense of uncertainty and risk for the U.S. and California economies as it threatens to increase inflation and slow economic growth, according to the UCLA Anderson Forecast.
It was two years ago this month that COVID-19 shutdown orders and other pandemic-related events led to an early recession call by Anderson Forecast economists.
“With the pandemic’s impact on the economy receding, we had originally assumed that consumption and production patterns would begin reverting to their pre-pandemic trends — easing pressure on supply chains and reducing inflation,” UCLA Anderson Forecast Senior Economist Leo Feler wrote. That expectation has been “upended by Russia’s invasion of Ukraine.”
U.S. gross domestic product grew 5.7% last year, rebounding from minus 3.4% GDP in 2020. The Anderson forecast now anticipates GDP growth of 4.3% this year, declining to 2.3% in 2024.
The forecast still predicts a return to previous economic activities will reduce supply chain pressures as consumers increase spending on services, and reduce spending on goods, but the invasion has derailed their assumptions regarding lower inflation, Feler wrote.
“Once again, our economic forecast comes with considerable uncertainty,” Feler wrote.
Factors driving that uncertainty are the pandemic, how long the Russia-Ukraine war will last and whether it will spread to other countries, as well as risks from global climate change and political divisions in the U.S., Feler wrote.
Higher oil and energy prices are continuing to push up inflation. Oil production in the U.S. shrank at the height of the pandemic as people stayed at home and avoided travel, but the supply has not kept pace as consumers returned to normal activities.
Oil prices, now above $100 a barrel, are expected to remain high and contribute to rising inflation through at least the second quarter of 2022, Feler wrote. He also expects U.S. shale oil producers, who had ceased pumping during the pandemic, to slowly resume production.
Ultimately, the forecast predicts a significant supply response in the U.S., along with an expected increase in production from OPEC members will lead to a decline in oil prices and a check on inflation in the latter half of 2022.
That tracks with an analysis released by Moody’s Investors Service analysts on Tuesday, which opined that inflation’s impact on municipal credit would be relatively muted in 2022, and analysts expect it to decline later this year.
The costs facing state and local governments and other U.S. public finance issuers are rising at their most rapid pace in 40 years by some measures, Moody's said, but most enter the current inflationary period with financial positions bolstered by recently solid revenue growth, an influx of federal aid and improved pension funding fueled by strong 2021 investment returns.
Most governments and other U.S. public finance issuers will navigate expense increases in 2022 without a material erosion of their credit quality, Moody’s wrote.
Though the effect of inflation on municipal credit will be relatively muted in 2022, if high inflation extends well into 2023, governments and other U.S. public finance issuers will face more challenging expense hikes, plus growing revenue risks, Moody’s wrote, adding that rising interest rates pose a risk to state and local governments' pension assets and capital plan affordability.
Inflationary pressures could also result in credit pressures and
Anderson Forecast's Feler also baked into his forecast a substantial increase in U.S. defense spending that takes into account the Russia-Ukraine war, but also the possibility the conflict could embolden other countries to become aggressors, for instance, China with Taiwan.
An uptick is expected in the second quarter of 2022, to 6.1% GDP growth on a seasonally adjusted annual basis, as the economy moves past the pandemic and demand for consumer services surges, according to the Anderson Forecast. Consumer and business spending are expected to propel normalized growth of around 3% to 4% on an annual basis for the remainder of the year.
In California, many sectors are showing growth including technology, but leisure and hospitality with its dependence on international travel remains weak, wrote UCLA Forecast Director Jerry Nickelsburg, who authored the California forecast.
“With many Asian countries still imposing restrictions whenever an outbreak of COVID-19 happens, no matter how mild it might be, a long, slow process of recovery in foreign tourism is likely,” Nickelsburg said. “The good news is it has been and remains a drag on growth in an economy that has been outperforming most other states all year.”
Though home building is expected to result in 123,000 net new unit permits in 2022 and permitted units to grow to 151,000 in 2024, Nickelsburg wrote, the prospect for the private sector to build out of the housing affordability problem over the next three years is nil.
California’s housing crisis is so severe that it is considered a
