The U.S. economy appears to be experiencing a much-anticipated soft landing, thanks to careful interventions by the Federal Reserve. The central bank’s measured increase in interest rates has resulted in a well-balanced economy with reduced inflation. This positive outcome bodes well for Americans.
However, the situation is quite different in other parts of the world. Europe, for instance, is grappling with weaker economic growth and higher inflation. China, too, is facing its own set of challenges, including sluggish growth, a decline in consumer spending and factory output, and worryingly low inflation levels.
In the euro-area, second-quarter growth narrowly avoided a recession, clocking in at a modest 0.3%. The United Kingdom fared even worse, with a mere 0.2% expansion in the three months leading up to June. In comparison, the U.S. economy grew by a more robust 0.6% during the same period, as reported by the Organization for Economic Cooperation and Development (OECD).
China’s problems are even more pronounced. The economy is grappling with a deflating property bubble and struggling to recover from the effects of Covid-19 lockdowns. Adding to the woes is the risk of deflation. Beijing has set a target of around 5% GDP growth for this year, which would be the lowest in twenty-five years. However, given the string of disappointing economic data released in recent months, achieving this goal seems unlikely.
It is worth noting that Beijing’s focus on new-economy infrastructure instead of traditional infrastructure implies that global economies may derive less benefit from Chinese infrastructure spending than they have in the past, according to strategists at BCA Research.
Overall, while the U.S. economy experiences a promising soft landing, the international landscape presents various hurdles that could hinder its progress.
The World Bank Warns of Global Economic Slowdown
The World Bank has recently issued a warning, stating that the global economy is potentially heading towards a “lost decade”. The forecast suggests that growth for the remainder of the 2020s could be at its lowest point in three decades. This alarming prediction is attributed to several factors, including an aging workforce, weakened investment, and lower productivity.
International comparisons surrounding this concern will likely be a topic of discussion at the Federal Reserve’s upcoming Jackson Hole summit in Wyoming. Scheduled to take place from August 24th to 26th, the event is a gathering of central bankers from around the world, including Fed Chairman Jerome Powell. The symposium focuses on “Structural Shifts in the Global Economy.”
Despite the overall global economic uncertainty, there are still positive signs for the United States. Core inflation continues to decline, and the job market has cooled down without causing a significant increase in unemployment rates. Additionally, the real GDP growth is projected to be above average for the OECD this year, leaving room for potential improvements.
During the second quarter, the US GDP rose by 2.4% on an annualized basis. The Federal Reserve Bank of Atlanta’s GDPNow model, which relies on available economic data, forecasts that there will be an annualized rise of 5.8% in the third quarter.
Market analysts are optimistic about the Federal Reserve’s ability to lower interest rates next year, which would contribute to overall economic growth. Goldman Sachs predicts that interest rates will be cut starting in mid-2024 until the federal funds rate reaches around 3%. Currently, the rate is within a range of 5.25% to 5.5%.
India stands out as a bright spot among major economies, with the highest projected GDP growth of 6.0% this year, according to the OECD. However, it lacks the economic influence that Europe and China possess.
Bruce Kasman, chief economist at J.P. Morgan, points out that historically, crises originating from the euro area and China have had less impact on the global economy compared to crises centered around the United States. Nevertheless, the strength of the U.S. economy is closely tied to the well-being of the rest of the world.
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