Since the end of 2009 nominal growth has been higher than nominal rates (aside from the first half of 2020, when the covid-19 pandemic crashed the economy). Now America is about to cross the threshold. In the first quarter of 2023, despite annualised real economic growth of only 1.1%, troublesomely high inflation meant that nominal gdp rose at an annualised rate of 5.1%, roughly in line with today’s federal funds rate. A panel of economists surveyed by Bloomberg, a data firm, anticipate that in the second quarter of the year growth will slip to just 0.4% and inflation to 3.3%. Nominal growth is forecast to be just 3.7%—well below nominal rates of around 5.2%.
“This is when the rubber really meets the road for the economic cycle,” notes Carl Riccadonna of bnp Paribas, a bank. “This is the point at which, if you’re a business, your revenues are now growing more slowly than your cost of financing.” Wage growth will lag debt growth. Government debts will grow faster than tax receipts. A single quarter of this might be bearable. Unfortunately, economists expect the situation to last a year or more.
The precise impact depends on the extent to which debt reprices as interest rates rise. The vast majority of American homeowners have 30-year fixed-rate mortgages. This generous financing will protect them against a pincer-like combo of slowing wage growth and rising interest expenses. Nevertheless, consumers carrying other kinds of debt—including revolving credit-card balances and private student loans—will feel the pinch.
Welcome to a bad time for big debts https://t.co/fPcefvWCrY
— The Economist (@TheEconomist) May 25, 2023