Massive stimulus measures implemented by governments to support their economies during the pandemic and following supply chain disruptions have led to increased money supply and rising inflation.
Over the past two years, central banks have addressed this problem by tightening monetary policy, mainly through interest rate hikes aimed at cooling demand and bringing prices back under control.
Many were concerned that this approach could trigger a global debt crisis or, at the very least, push countries into recession. However, it appears that we can avoid the worst-case scenario.
In the United States, GDP growth in the second quarter was 3% year over year, driven by strong consumer spending and business investment. The overall growth figure for the year is expected to be around 2.7%.
For context, the average annual growth rate from 2018 to 2023 was 2.3%. So, the U.S. economy is in pretty good shape with no hard landing in sight, even though a slowdown to 1.8% is expected next year.
Europe is also managing to hold its ground. The European Commission has projected that GDP growth in the European Union will be 1% in 2024, with expectations for improvement to 1.6% in 2025.
However, it is fair to mention the concern of ECB members about signs of deterioration in the labor market and the fact that current dynamics and GDP forecasts for Europe are somewhat below expectations.
More importantly, the sacrifices have yielded the desired results: price growth seems to be returning to the optimal level of 2% per annum in Europe and the United States.
The latter has allowed the Fed and the ECB to lower interest rates. Now, the story could have ended there, but it would be too simple. Risks remain that inflation could rise again.
Some worry that if Donald Trump returns to the White House and starts another round of trade wars with the rest of the world, it could increase prices, complicating matters for central banks.
They worry that imposing tariffs of 60% on goods from China and up to 20% on other countries could trigger the biggest trade shakeout since the Smoot-Hawley Act, which deepened the Great Depression.
It is not surprising, then, that the dollar index will rise again. This could negatively affect commodity prices such as gold and oil and the U.S. stock market in general, including the S&P 500.
In summary, although significant progress has been made in the fight against inflation, it is still too early to say that the problem is solved or that it will not rear its head again soon.
