A deflating property bubble is contributing to China’s struggles. Here, residential buildings in Ningbo, China.
Qilai Shen/Bloomberg
The prospect of a soft landing for the U.S. economy seems to be coming true. The Federal Reserve looks to have engineered a Goldilocks scenario, wherein a just-right increase in interest rates has led to a just-right economy and diminished inflation.
That’s good news for Americans—but there is no Goldilocks abroad. And a hard landing elsewhere could hold the U.S. back.
In Europe, economic growth is weaker and inflation is higher. In China, growth is still weak; consumer spending and factory output have flagged, the government reported on Tuesday; and inflation is too low.
The euro-area economy grew by 0.3% in the second quarter, narrowly avoiding a recession. The United Kingdom expanded by just 0.2% in the three months through June, according to data published on Aug. 11. By comparison, the U.S. economy grew by 0.6% in the quarter, according to the Organization for Economic Cooperation and Development, or OECD.
China has even bigger problems than Europe. A deflating property bubble and a weak recovery from Covid-19-era lockdowns have left the economy struggling. Plus, there’s a whiff of deflation. Beijing is aiming for about 5% growth this year in gross domestic product, the lowest target in a quarter-century. China’s economy is unlikely to get there, considering a string of disappointing data released in recent months.
More stimulus may be in the works—China’s central bank cut key interest rates on Tuesday—but authorities are wary of going too far with stimulus, lest that lead to bigger problems in the future.
“Beijing’s shift in investment focus from traditional to new-economy infrastructure implies that the global economy will benefit less from Chinese infrastructure spending than in the past,” wrote strategists at BCA Research in a recent research note.
The World Bank has warned of a “lost decade” for the global economy, and has forecast that growth for the remainder of the 2020s could hit a three-decade low. It cites an aging workforce, weaker investment, and lower productivity.
Expect to hear more international comparisons at the Federal Reserve’s Jackson Hole, Wyo., summit on Aug. 24-26. The title of the symposium, which attracts central bankers from all over the world, including Fed Chairman Jerome Powell, is “Structural Shifts in the Global Economy.”
Right now, economic signs are good for the U.S. Core inflation is still dropping. The job market has cooled without causing a spike in unemployment. Real GDP growth is expected to be above average for the OECD this year, and things might improve from there.
U.S. GDP rose 2.4% on an annualized basis in the second quarter. The Federal Reserve Bank of Atlanta’s GDPNow model, which estimates real GDP growth based on available economic data, forecasts an annualized rise of 5.8% in the third quarter.
Markets see the Federal Reserve as having the scope to start lowering interest rates next year, which would ease a big headwind for economic growth. Goldman Sachs predicts that the Fed will start cutting interest rates by the middle of 2024, until the federal-funds rate returns to about 3% from a range of 5.25% to 5.5% currently.
India is another bright spot, with the highest projected GDP growth of all major economies this year, at 6.0%, according to the OECD. But it lacks the economic muscle of Europe and China.
Bruce Kasman, chief economist at J.P. Morgan, notes that crises emanating from the euro area and China historically have had less impact on the global economy than U.S.-centered crises. Still, the U.S. economy is strongest when the rest of the world is doing well.
Write to Adam Clark at [email protected]
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