Two Federal Reserve decisions next week will shape a global economy whose growth the World Bank predicts will slump this year and remain “frail” through 2024.
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 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. 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.
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.
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