Global economy low – interest rates

A pair of central bank decisions next week will shape the outlook for a wobbly global economy that the World Bank warns in a downbeat new assessment is battling stubbornly high inflation amid the pandemic’s aftermath and the war in Ukraine. The gloomy forecast arrives days after one threat to global growth was eliminated when President Biden signed legislation Saturday to raise the U.S. debt ceiling and avert a potentially catastrophic government default. But other risks remain: China’s reopening after the end of its “zero covid” policy is starting to flag, while the German economy has shrunk for two consecutive quarters, meeting one definition of a recession. Even in the United States, where growth remains resilient, most analysts anticipate that activity will ebb in the coming months. The World Bank said in a new report Tuesday that the global economy is slowing dramatically as higher interest rates take a toll on both advanced and developing economies. Overall, global growth is projected to slump to an anemic 2.1 percent annual rate this year, down from 3.1 percent in 2022, and will remain “frail” through next year, according to the bank’s latest forecast. Investors now are focused on how much more work the Federal Reserve and European Central Bank must do to stem inflation, which has declined from last year’s highs but remains elevated. Fed officials have signaled they may pause at next week’s meeting after lifting their benchmark lending rate over the past 14 months at the fastest pace in four decades. European policymakers are expected to increase the euro zone’s key rate by a quarter percentage point when they meet next week. German inflation eased to 6.1 percent in May following several months of declines, even as Europe's biggest economy registered another painful increase in food prices of nearly 15 percent. (Markus Schreiber/AP) “The risks for both of them are high, and they always were in this inflationary environment. There is a chance they overdo it,” said Kathy Bostjancic, chief economist for Nationwide. If central bankers raise rates too much, the United States or Europe could be driven into recession. But if they fail to raise them enough, inflation will keep eroding living standards. Striking the right balance is difficult. In the United States, Fed officials warn that the full effects of the rate increases already enacted have not yet been felt. As the Fed considers whether more increases are needed, it must also take into account other forces that are expected to slow the economy, such as tighter lending conditions in the wake of recent bank turmoil and government spending cuts under the debt ceiling deal. In Europe, meanwhile, annual inflation dipped in May to 6.1 percent from 7 percent in April. Energy costs are falling, after a spike last year at the outset of Russia’s invasion of Ukraine. But food, alcohol and tobacco prices are soaring at a double-digit annual pace, according to the European statistical agency. “How quickly will inflation come down? How much higher do rates have to go up? We’re obviously focused on that,” said Neil Shearing, chief economist for Capital Economics in London. Higher interest rates represent a challenge that ripples from big economies to small ones, according to the World Bank. When the Fed raises borrowing costs, it slows the U.S. economy by making it more expensive for consumers and businesses to obtain loans. That reduces demand for goods produced overseas, hurting growth there. Higher U.S. interest rates also encourage investment in the United States rather than elsewhere. The inflow of capital pushes up the value of the dollar, which makes it more expensive for foreign governments and businesses to repay their dollar-denominated loans. Spillovers from Fed policy could lead to a financial crisis in the most vulnerable developing nations, which borrowed heavily over the past three years to deal with the pandemic’s health and economic consequences, the bank warned. The danger of renewed weakness in the banking industry could further constrict credit, aggravating those effects. “The global economy remains in a precarious state,” the bank’s latest assessment concluded.