Right before Russia invaded Ukraine, Colorado’s economy was expected to downshift from last year’s unsustainable pace to a slower but still above-average rate in June, according to ColoradoCast, a short-term economic forecast from Colorado State University.
But last week’s invasion has thrown financial markets into turmoil, driven up oil and natural gas prices, and opened the door to the possibility of a much broader conflict. That could weigh further on an economy already struggling with inflation and higher interest rates.
“It is unlikely but not impossible that the situation in Ukraine could result in negative growth rates in what would start to look like a recession,” said Phyllis Resnick, director of the Colorado Futures Center at CSU. “People are devastated about what is happening, but it doesn’t affect the decisions they make about their daily life the same way as COVID-19 did.”
When the first ColoradoCast was released in early December, it was measuring an unsustainable growth rate of around 10% a year, reflecting strong spending and hiring during a pandemic rebound. The forecast, which looks six months out, called for growth to slow to 6.5% a year in April.
The second forecast, out Wednesday, had the state’s economic growth around 9% in January and 7.5% in February, with inflation and higher interest rates friction points for the economy. By June, the forecast expects Colorado’s economic growth to slow to 4.47%, less than half the annual pace seen in December.
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Given that the 20-year average for state GDP growth in Colorado is 3.25% a year, a growth rate of 4.5% still represents an above-average pace, Resnick said.
ColoradoCoast, based on the Federal Reserve Bank of Philadelphia’s Coincident Economic Activity Index for Colorado, looks at changes in home prices, the direction of the stock market, the spread between short-term and long-term Treasury bonds, the risk investors see in corporate bonds, initial claims for unemployment insurance, and changes in employment by staffing firms.
More risk-averse bond and stock markets were signaling slower growth rates ahead last month, but Resnick said at the time it was hard to spit out how much of that reflected concerns about the Federal Reserve tightening monetary policy and how much was linked to the troop build-up near the Ukrainian border.
One way consumer spending will be hit early on is through higher prices at the pump. With COVID-19 cases down significantly, more employers are expected to finally call their employees back to the workplace, which could add to household costs. Higher heating bills could put a squeeze on budgets too, given the need to shift more natural gas production to Europe. But with warmer temperatures around the corner, the hit won’t be as hard as had the invasion happened in the fall.
If oil and gas prices remain elevated, it could benefit the state’s petroleum producers, offsetting some of the blow, Resnick said. And if fewer people travel to Europe, it could boost domestic travel to states like Colorado.
So many unknowns remain out there. Resnick said she plans to run the model every month rather than every three months to get a sense of what it is capturing.
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