• Wed. Feb 28th, 2024
The world economy is still at risk

Economists are not known for their optimism, but today their good cheer is palpable. Not long ago, an American recession seemed inevitable as the Federal Reserve kept raising interest rates. To fight inflation. Other central banks followed suit, exacerbating their inflationary problems A rising dollarA particular problem for emerging markets that borrow and trade using the US currency. Yet news that America’s annual inflation rate fell to 3% in June gave hope that the Fed’s next rate hike, expected on July 26, could be its last and that other central banks might relax. Stocks rose, bond yields fell and the greenback is at its weakest since the Fed began Raising rates.

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The surge in expectations is unusual as the world economy slows. (Reuters photo)

Leaps of hope is all the more extraordinary, because World economy Slow down. China reported on July 17 that its economy grew just 0.8% in the second quarter from the previous three months, despite many expecting a rebound after the government quit.Zero-Covid” policy in December. Global manufacturing collapsed as consumers came out of lockdown, eating out more and buying less home-office equipment. Also, although America grew strongly in the first half of the year, most forecasters expect the economy to slow soon.

However, they don’t expect it to shrink. The best-case scenario is growth cooling enough to reduce inflation without a recession Overheated economies Like America. Even a disappointing recovery in China, which has no inflation problem of its own, means there hasn’t been an alarming rise in global commodity prices. That helped Europe export the liquefied form instead of piped Russian gas.

Yet it would be wrong to think that the world economy is now on a so-called soft landing for three reasons. The former has low inflation but remains well above the central bank’s 2% target. The drop in US headline rates was due to a sudden drop in energy prices: Excluding food and energy, prices were 4.8% higher than a year ago. In the Eurozone, the figure is 5.5%, and in both economies, wages still outpace productivity growth.

US Consumer Prices (The Economist)

In other words, the rich world has some way to go before it fully inflates — and many economists expect the last mile to be the toughest. While 3-4% inflation may not grab the headlines as much as the alarming inflation of the recent past, it will still be a problem for central bankers. They may have to choose between tightening more than currently expected and quietly abandoning their 2% targets. Either would disrupt asset markets and the real economy.

A second risk is that while the world is now seeing the benefits of cooling, the costs may not become apparent for some time. So far America’s labor market has rebalanced relatively painlessly, with fewer vacancies than jobs. Hiring is still strong and layoffs are rare. Due to fewer job opportunities, wage growth has slowed. Yet no one knows to what extent the job market can shed fat rather than muscle—and the decline in job openings has stalled alarmingly in recent months. Across the rich world, there is evidence that firms, crippled by the memory of labor shortages, have been hoarding workers they no longer need; Average working hours have decreased in many countries. If companies decide it’s too expensive to hang on to workers they may or may not need in the future, layoffs can quickly rise.

A third danger is that the divergence between the world’s major economies means policymakers elsewhere are worried even as pressure on the Fed is lifted. Britain is celebrating a bigger-than-expected drop in annual inflation in June, but with underlying price and wage growth around 7%, it remains a troubling outlier (see Britain section). Japan had barely started monetary transactions; With inflation picking up, the Bank of Japan may readjust the ceiling on long-term bond yields in late July. Like Japan in the early 1990s, China may struggle with a structural growth slowdown that burdens the economy with bad debt.

Wherever you look, in other words, there is great uncertainty about where inflation and interest rates will eventually settle. By all means, celebrate the good news. But the world economy is not yet out of danger.

© 2023, The Economist Newspaper Limited. all rights reserved. From The Economist, published under license. Original content can be found at www.economist.com

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