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A war on top of a pandemic lends uncertainty to US economic outlook

Activists kneel during a moment of silence during a protest against Russia's war on Ukraine war Saturday in Washington. The war has roiled world energy prices and created a massive refugee crisis, promising to slow economic growth in a key export market.Alex Brandon/Associated Press

WASHINGTON — The hits just keep coming for the US economy.

A deadly pandemic that won’t quit, and is continuing to disrupt global supply chains as another subvariant ominously gains traction. A brutal war in Europe that’s roiled world energy prices and created a massive refugee crisis, promising to slow economic growth in a key export market. And rising interest rates here at home as the Federal Reserve tries to rein in decades-high inflation.

The US economy has displayed remarkable resilience in the two years since coronavirus struck, weathering shutdowns and supply chain disruptions. Rebounding strongly from a short, steep recession in 2020, growth last year was the best since 1984, and set a record with 6.7 million jobs created. The momentum in the labor market has continued into 2022, although the pace of overall economic activity has slowed.


These latest challenges pose a formidable new test. While government officials and analysts are optimistic the economy will survive the parade of horribles, there’s not much of a back-up plan if it can’t. The federal government is so tapped out after spending nearly $6 trillion on COVID relief that there’s little hope for any more stimulus from Washington.

“I would say other than World War II, this is the most uncertainty we’ve faced,” said William Spriggs, a Howard University economics professor and chief economist at the AFL-CIO organized labor federation. He noted that Russian President Vladimir Putin, who launched the invasion of Ukraine, is as unpredictable as the fast-mutating coronavirus.

Kristalina Georgieva, managing director of the International Monetary Fund, which loans money to distressed economies as part of its work to foster sustainable growth, recently observed that we are living “in a more shock-prone world” that is grappling with a devastating one-two punch.

“So, we got through a crisis like no other with the pandemic, and we are now in an even more shocking territory,” she told reporters in Washington this month. “The unthinkable happened: We have a war in Europe.”


The IMF is likely to reduce its forecast for world economic growth because of Russia’s war in Ukraine, she said. That’s already happening for the US economy. Private analysts have cut their estimates of economic growth for this year, with investment bank Goldman Sachs recently lowering it to a sluggish 1.75 percent. The US economy expanded 5.7 percent in 2021.

Federal Reserve officials are more optimistic, though on Wednesday they still significantly cut their forecast for US economic growth in 2022 to 2.8 percent, down from the 4 percent estimate made in December. They also said the war, which has caused oil prices to jump, will keep inflation in the United States from declining as much as they had hoped it would this year.

“The financial and economic implications for the global economy and the US economy are highly uncertain,” Fed Chair Jerome Powell said. On top of higher prices for oil and other commodities produced by Russia and Ukraine, the war could restrain economic activity around the world, further disrupt supply chains, and continue to cause volatility in financial markets that would lead to tighter credit, he said.

Despite those concerns, the Fed moved ahead Wednesday with a significant initial step in its fight against inflation. Central bank officials enacted the first small hike in their benchmark interest rate since 2018, and forecast a series of additional increases to bring the rate to about 2.8 percent by the end of next year. The Fed had kept it near zero since the pandemic hit two years ago to encourage spending by consumers and businesses.


But as the economy reopened from lockdowns, that spending — partly fueled by federal stimulus — has combined with snarled supply chains still recovering from the pandemic to send inflation soaring. Fears of disruptions to Russian oil supplies after it invaded Ukraine added to the upward pressure on prices. The consumer price index jumped 7.9 percent in February, compared with a year earlier, the highest rate since 1982.

The interest rate increases will ripple through the economy and cause some consumer pain even as they should lower inflation. Americans can expect higher interest rates on mortgages, which have already begun kicking in, as well as on credit cards and auto loans. But Powell was optimistic the US economy, bolstered by a strong labor market, can withstand it without tipping into recession.

“Chairman Powell’s paid to be optimistic, and in the face of seven rate hikes this year and a handful next year, of course he’s going to say the economy’s strong enough to handle it,” said Jack Ablin, chief investment officer at Cresset Capital, an investment advisory firm. That optimism buoyed investors in the stock market, where major indexes gained this past week after sliding earlier this year largely because of the Ukraine crisis.


But Ablin doesn’t share Powell’s optimism and thinks investors in stocks “are taking a pretty large leap of faith that he’s correct.”

Spriggs also is worried. The Fed is limited in how much it can influence inflation that is largely the result of pandemic supply chain problems, further fueled by the oil shock from the Ukraine war, he said.

“If in World War II I told you the price of oil is going up, this is horrible, you’d say, ‘Yeah, because there’s a war and people are cutting off oil production,’” Spriggs said.

Raising interest rates won’t solve that problem. They will, though, constrain companies such as automakers that need to borrow money to find alternate supply sources, he said. The Fed rate hikes risk further slowing the US economy just as it faces new shocks from the war that soon will go beyond oil. Ukraine is known as the breadbasket of Europe and its production of wheat, corn, and seed oil will also be disrupted.

“The Fed is flying into very strong headwinds,” Spriggs said. “We had been poised to come out of COVID with a really strong, solid economy and now they’re risking that we’re going to hobble out of this.”

Moreover, the economic effects from COVID are far from over.

Possibly fueled by the highly transmissible Omicron subvariant BA.2, COVID cases are rising in some European nations. And a resurgence of the virus in China has led to lockdowns there that will only further disrupt global supply chains by closing factories.


“China’s a real risk at this moment,” said Douglas Holtz-Eakin, president of the American Action Forum, a conservative-leaning Washington think tank.

He agrees with the Fed’s plan for interest rate hikes to tamp down inflation and address Americans’ fears that the price hikes are here to stay, which would likely only worsen the phenomenon. The Biden administration should focus on ending the war in Ukraine and preparing for another spike in COVID cases, he said.

“If you don’t take care of those things, we don’t have any good choices,” Holtz-Eakin said.

The combined effects of high inflation and rising interest rates will make this year difficult for consumers, economists said. The Biden administration has been working to ease the congestion at US ports that has contributed to the supply problems, and is looking into whether companies are artificially inflating prices in concentrated industries like meatpacking.

Lawmakers also are floating ideas to try to ease some of the economic pain, including taxing high profits by oil companies to penalize price gouging and temporarily suspending the federal gas tax to lower prices at the pump, a move some states also are pursuing. But with narrow majorities in an election year, it’s unlikely Democrats will be able to enact anything significant to deal with the economy. Congress hasn’t even been able to pass a relatively modest $15.6 billion package of additional pandemic aid.

So economists are warning Americans to brace for another tumultuous year, filled with unknowns. Even Powell acknowledged he’s not sure what to expect.

“We will need to be nimble in responding to incoming data and the evolving outlook,” he said Wednesday of the Fed’s monetary policy. “And we will strive to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain moment.”

Jim Puzzanghera can be reached at jim.puzzanghera@globe.com. Follow him @JimPuzzanghera.