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United States GDP, inflation and unemployment rate since 2005
Date: 27 Aug 2018 Category: Economics |
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We take a look at three of the main economic variables of the world's biggest economy, the United States of America from 2005 up to the latest available data for 2018. It is remarkable how quickly the world's biggest economy can recover from a crisis such as the financial crises set on by the sub prime mortgage loans in the USA. While a relatively small economy such as South Africa which one would expect to be more nimble is still struggling to recover from the recession caused by the financial crisis.
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USA unemployment vs economic growth vs inflation
The bar chart below shows the average unemployment, economic growth and inflation rate per year in the United States since 2005.
The blue bars shows the USA's unemployment rate, the red bars the economic growth rate and the grey bars the USA's inflation rate. All three of the main economic variables highlighted in this article are intertwined. Each a function or cause of the other. For example a decline in economic growth could lead to lower levels of inflation, as retailers and wholesalers drop prices in order to get rid of stock, or if economic growth declines due to a drop in demand for goods prices are reduced by retailers which squeezes the profit margins of businesses and in some cases leads to financial losses, which in turn could lead to people being dismissed as businesses looks to batten down the hatches during tough economic times. So a decline in the red bar could lead to a decline in the grey bars, and a spike in the blue bars.
The prime example of this is during 2008 and 2009. As the economy started to slow in 2008 and into 2009, one can see the inflation rate (grey bars) dropped substantially from 2008 to 2009, as businesses cut prices in order to get rid of stock and boost consumer demand. Not only did prices decrease, but the unemployment rate (blue bars) increased sharply. Unemployment rate was sitting at just under 6% in 2008 and shot up to over 9% in 2009 as businesses let staff go due to sagging demand in the economy. Less people employed meant there is less demand from goods and of course this ensured a very low inflation rate, as one of the main types of inflation (demand pull inflation) was no longer at play here as the demand in the economy was weak.
To those wondering what demand pull inflation is: Well lets say there is a fixed amount of supply for a specific item in the economy, as more and more people want the specific item the price will go up, as businesses know the demand is there and they are driven by profit motives and wants to sell the product at the highest price at which consumers will buy as they want to maximize profits as demand keeps increasing the price of the good will keep going up and the profits earned by businesses will keep going up". That is the basic premises for demand pull inflation.
But if the demand falls away and no one wants to buy the good in question anymore, the businesses has no choice but drop prices in order to get rid of the item in question, if there is still no demand for it, the price will continue to drop until there is a demand for the good again.
What is remarkable to us regarding the United States of America's economy is the pace with which it recovers from a major setback such as the financial crises. Since the financial crises, the US economy has grown at a average rate of 2.2% a year. During the same time period the South African economy, which needs a far greater growth rate than the USA to address its stubbornly high unemployment rate around 27.2% only grew by 1.8% over the same time period that the USA grew by 2.2% since the financial crisis.
So why is South Africa not growing at a faster rate? Well a few reasons we can highlight:
The prime example of this is during 2008 and 2009. As the economy started to slow in 2008 and into 2009, one can see the inflation rate (grey bars) dropped substantially from 2008 to 2009, as businesses cut prices in order to get rid of stock and boost consumer demand. Not only did prices decrease, but the unemployment rate (blue bars) increased sharply. Unemployment rate was sitting at just under 6% in 2008 and shot up to over 9% in 2009 as businesses let staff go due to sagging demand in the economy. Less people employed meant there is less demand from goods and of course this ensured a very low inflation rate, as one of the main types of inflation (demand pull inflation) was no longer at play here as the demand in the economy was weak.
To those wondering what demand pull inflation is: Well lets say there is a fixed amount of supply for a specific item in the economy, as more and more people want the specific item the price will go up, as businesses know the demand is there and they are driven by profit motives and wants to sell the product at the highest price at which consumers will buy as they want to maximize profits as demand keeps increasing the price of the good will keep going up and the profits earned by businesses will keep going up". That is the basic premises for demand pull inflation.
But if the demand falls away and no one wants to buy the good in question anymore, the businesses has no choice but drop prices in order to get rid of the item in question, if there is still no demand for it, the price will continue to drop until there is a demand for the good again.
What is remarkable to us regarding the United States of America's economy is the pace with which it recovers from a major setback such as the financial crises. Since the financial crises, the US economy has grown at a average rate of 2.2% a year. During the same time period the South African economy, which needs a far greater growth rate than the USA to address its stubbornly high unemployment rate around 27.2% only grew by 1.8% over the same time period that the USA grew by 2.2% since the financial crisis.
So why is South Africa not growing at a faster rate? Well a few reasons we can highlight:
- Economic and political risks: Who wants to invest here if government talks about taking land without paying for it? If property rights cannot be protected foreign capital and investments will stay away
- Corruption: : Large amounts of money stolen via corrupt activities were meant to develop infrastructure, provide education, better healthcare, security etc.
- Government red tape and poor service delivery and policy implementation: Lack of proper and effective government policy implementation and government policies which are seen as not being pro business is keep capital away from South Africa
- Labour laws and unions: Employing and firing people in South Africa is a costly and time consuming exercise. Certain foreign companies do not want to deal with South Africa's restrictive labour laws and the powerful labour unions (which holds big sway in the ruling party's support base)
- Lack of educated and skilled staff: South Africa experienced and is still experiencing a "brain drain" where those who have the skills and knowledge to drive SA's economy forward are emigrating to Australia, Canada, New Zealand etc.
- High company and dividend tax rates. Who wants to start a business here if most of their hard work goes towards state coffers which is then spent ineffectively and dwindled away due to corruption, over priced tenders etc.