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Global Economic Outlook – September 2022 The pandemic aid that buoyed federal spending in 2020 Inflation slowly cools and 2021 has come to an end, while much of the spending associated with the infrastructure bill and efforts to A perfect storm of strong demand, supply chain disruptions deal with climate change will take time to ramp up. The and the war in Ukraine created the largest move up in full effects of those latter shifts will not be felt until the inflation we have seen in more than four decades. A strong mid-2020s. dollar, a drop in prices at the gas pump and some easing State and local government coffers are in better shape. Tax of supply chain disruptions have alleviated the upward revenues shot up with the surge in spending on goods and pressure on some goods prices. Used vehicle prices are homes, while transfers from the federal government to deal once again depreciating after soaring above the sticker price with the pandemic have yet to be spent. Many of those of new vehicles in 2021. windfalls were put into rainy-day funds to cushion budgets The jury is still out on how long energy prices can remain from future claims on revenues. low. Much depends upon supply constraints, which remain A portion is being used to temporarily suspend taxes on substantial, and how far the Russian government is willing energy, food and school supplies. Those shifts and a surge to go to weaponize its oil reserves. Investors pushed shale in tax rebates is helping to blunt the blow of persistently producers to curb their expansions and return more of high inflation and keep spending afloat. That makes for good their profits to the owners of capital in the shale industry, politics but bad economics; tax rebates are poorly targeted after the bath they took at the onset of the crisis. Neglect and will boost demand at the same time the Federal of energy infrastructure is another hurdle to increase Reserve is trying to curb demand and inflation. production at home and abroad – refining capacity is particularly limited. A strong dollar and weaker growth abroad suggest that A larger issue is service sector inflation, which is more the trade deficit will reverse course and widen by year- dependent upon the cost of labor. High wages, high end. A sharp slowdown in growth here is not expected to turnover rates and a persistently high level of Covid offset the drag of even deeper recessions abroad. Imports infections, which is exacerbating staffing shortages, are should continue to outpace exports and the trade deficit is boosting labor costs. Aging demographics and a surge in expected to widen in 2023. Long Covid cases are adding to labor shortages and will make those shortages more chronic as we get into the Chart 7: U.S. growth stalls below trend mid-2020s. 22 This is happening at the same time as the boost to productivity growth triggered by the pivot to working from ecession ecession CBO 2020 home is evaporating; workers are using more of the time 21 R R Projection they saved by not commuting to engage in leisure activities. rillions20 The payoff to technological advances remains concentrated T Forecast in a few large tech-savvy firms. It is not yet diffuse enough , 2021 $, 19 to raise the level of overall productivity growth and offset GDP Actual the shortfall in labor due to aging. A surge in retirements 18 by the baby boom generation and early retirements is not being offset by younger workers entering the labor force. An 17 additional two to four million workers are estimated to be Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 suffering from Long Covid and are unable to work. 2019 2020 2020 2021 2021 2022 2022 2023 2023 2024 2024 Source: KPMG Economics, Bureau of Economic Analysis. A surge in immigration could help alleviate those pressure but doesn’t seem likely. The backlogs to immigration created by the pandemic are still substantial, while immigration reform remains on hold. Foreign students, who are dwindling in ranks, are looking for guarantees that they can continue to work in the U.S. once they relocate. © 2022 Copyright owned by one or more of the KPMG International entities. KPMG International entities provide no services to clients. All rights reserved. 8

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