Interest rates

War in Ukraine, high interest rates pose big risks to CA economy

Russia’s invasion of Ukraine, supply chain bottlenecks and runaway inflation mean risks to California’s economic health “have been heightened,” the new budget said on Friday. of Governor Gavin Newsom.

The administration said in its economic forecast that growth forecasts had been “downgraded slightly” since its last report in January. A significant downturn, he warned, could have “significant implications for the administration’s revenue forecast.”

Newsom unveiled a $300.6 billion spending plan on Friday, aided by a projected surplus of $97.5 billion.

Since the January budget, economic conditions have deteriorated, sometimes abruptly. Financial markets have been shaken, consumer confidence has plummeted, gasoline prices have hit record highs and other prices are rising at their fastest pace in 40 years.

Newsom had assumed interest rates would not rise until 2023, but the Federal Reserve has implemented two increases in the past two months, with more expected this year.

Mortgage interest rates are now averaging above 5.5% for a 30-year loan, down from 3% since the start of this year.

The new budget saw consumer prices in California rise 6.8% this year, well above the 3.8% projected in the last budget proposal.

Consumer confidence in the economy, as measured by the University of Michigan’s Consumer Confidence Index, has plunged 28.7% nationally over the past year.

There has been good news: unemployment in California, projected in the last budget to average 5.6% this year, is now expected to reach 4.7%.

And the budget predicts that “the ongoing pandemic will no longer cause major disruptions to the economy.”

war and the economy

What previous forecasts could not see is the Russian-Ukrainian war which is now driving many of the risks.

The war, which began in late February, “is estimated to have a moderate effect on short-term economic growth,” the budget said.

Not only could the war help keep food and energy prices up, it could also disrupt the already strained supply chain system.

“These recent events in Ukraine, along with the COVID-19 lockdowns in China, are expected to delay the resumption of normal supply chain operations by several quarters from what was assumed in the Governor’s budget,” the statement said. new budget document.

If the war drags on, the risks increase, according to an analysis by Moody’s Analytics, an economic research firm.

Moody’s, which studies state and regional economic trends, warned last month that under its “protracted conflict” scenario, the state’s economy would not grow next year at the projected 2.8% rate. .

If the war persists, Moody’s predicts that the Northeast and California “will be somewhat more vulnerable to a scenario in which war leads to a sharp contraction in Europe.” The impact on tourism and finance puts these parts of the country in a vulnerable position should the global economy begin to suffer more dramatic losses.

Price and pain

Californians have been feeling the economic pain for a while.

The state’s unemployment rate in April was 4.9%, still above the national average of 3.6%, though well below the state’s 8.4% a year earlier.

The “Back to Normal Index”, compiled by CNN Business and Moody’s, indicates that the California economy is 92.2% back to where it was before the COVID-19 pandemic began in March 2020. This is ranks 38th among the states. The national average is 94%.

Energy prices continue to rise. The average price of a gallon of regular gasoline in the state on Friday was $5.87 and in Sacramento was $5.83, according to AAA.

There seems to be no end in sight to gas price increases.

“We can already see $6 a gallon prices here and there. As long as the war in Ukraine continues and the Saudis don’t want to pump more oil, high prices will continue,” said Sung Won Sohn, president of SS Economics, a Los Angeles-based economic consultancy.

He saw no indication that Californians are driving less, so “during the summer driving season, the upward pressure on gas prices will increase.”

Newsom saw a path to better days ahead.

“There are a variety of reasons why the economy could perform better than projected in the May revision forecast,” the budget said.

Inflation could ease as supply chains become more robust. The Ukrainian-Russian war could end. Tourism could pick up and a change in tariffs on imports from China and elsewhere could boost trade.

“A faster-than-expected easing of supply chain constraints could help ease inflationary pressures and support even stronger growth in economic activity,” the budget said.

This story was originally published May 13, 2022 1:38 p.m.

David Lightman is McClatchy’s chief congressional correspondent. He has been writing, editing, and teaching for nearly 50 years, with stops in Hagerstown, Riverside, California, Annapolis, Baltimore, and since 1981, Washington.