How the Global Economic Picture Affects Our Finances
Often, we get so focused on what’s happening here at home that we lose sight of the global economic picture. But amid the past expectations of a global recession in 2023, the global economy affects Americans now more than ever.
I wanted to offer a bit of context about the global economy and how it could affect us here in the United States this year.
Inflation: A Global Issue
Since 2021, rising inflation has been an issue for many countries. In response, central banks around the world have raised interest rates simultaneously.
The more aggressively central banks raise rates around the world, the greater the risk of an economic slowdown here in the United States. One reason why: As many G20 countries raise interest rates, domestic output in the United States can be affected.
It’s important to note that though international factors impact the United States, the reverse is true as well, making this phenomenon a bit of a chicken-or-egg scenario. Leading in technology and gross domestic product and home to the world’s reserve currency, the U.S. ultimately sets the bar and tone for the direction of the global economy.
And as the U.S. Federal Reserve has increased interest rates aggressively during its 2022 campaign to reduce inflation, that has not happened in a vacuum–other world central banks have followed suit.
Ultimately, the interconnectedness of inflation, interest rates, and recession risk flows both ways.
Present International Factors
Russia-Ukraine War
Europe has been more susceptible than the U.S. to the economic effects of the war. But impacts have been felt here at home, too.
The Federal Reserve Bank of Dallas predicts a decline in the gross domestic product (GDP) in the U.S. in 2023, citing the war as a factor in global growth slowdown expectations.
Americans have grown less concerned with the war in recent months, seemingly around the same time gasoline prices began falling.
However, the war has created other supply chain disruptions for the U.S. and contributed to high energy prices in petroleum products and natural gas.
United Kingdom
2022 was a rough year across the pond for the United Kingdom (U.K.), as an economic crisis gripped the nation and forced swift tax-cut decisions that were later reversed to appease markets. The tax cuts would have been funded by increased government borrowing as U.K. citizens struggle to meet everyday living expenses.
As the crisis deepened in September 2022, confidence in the financial landscape of Britain eroded, and the British pound reached all-time low levels against the U.S. dollar.
U.K. Inflation
If the last United States Consumer Price Index (CPI) reading of 2023 was rough, think again. While the U.S. figure was 7.7%, the U.K.’s December CPI reading shows annual inflation running at 10.7%, which actually represents an easing from November’s reading (a 41-year high).
As in the U.S., interest rates in the U.K. have been rising to curb inflation. The current bank rate in the U.K. is 3.5% as of January 2023, with expectations for further increases this year. For comparison’s sake, the U.S. benchmark interest rate is currently 4%.
Recently, there have been increasing labor strikes in protest of the exorbitant cost of living within the United Kingdom.
How Do War, U.K. Issues Affect Americans?
They certainly don’t do anything to help global jitters, as confidence has eroded throughout 2022, and expectations for a global recession weigh worldwide. The global events serve as a basis for comparison of inflation spiraling out of control.
For example, the U.S. Fed could see the situation in the U.K. as a signal to keep its foot on the gas with interest rate hikes, affecting our borrowing costs and much more.
With that said expectations for the U.S. Fed to hike interest rates at least more slowly have gained traction recently with some improvement in U.S. inflation metrics. Time will tell if improvement shows in other countries like the U.K.
America: Best House in a Bad Neighborhood?
Amid this global inflation and central bank response, the U.S. dollar has risen steeply against other international currencies. Why is that?
Simply put, the U.S. economy is healthier than the economies of many other countries, and the Federal Reserve continues to raise interest rates. In foreign exchange, countries with higher interest rates tend to have a higher exchange rate versus countries with lower interest rates.
Higher interest rates tend to attract foreign capital, as the deposits can earn more interest versus keeping that capital deposited domestically. It’s also true that the U.S. dollar is the world’s reserve currency and often attracts capital during turbulent times.
Putting It All Together
Considering the global economy helps to provide a fuller understanding of our financial lives as Americans. U.S. policy certainly influences the rest of the world in a big way, but international policies and developments also shape our lives here at home.
If you have questions about the global economy, U.S. markets, or your portfolio, please contact me at john@teckmeyerfinancial.com or call Tel: 402.525.0548, Office: 402.331.8600.
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