The threat of a US debt crisis has receded as lawmakers passed a bill to raise the debt ceiling, avoiding a global market meltdown. While this crisis was avoided, there are still other problems to be addressed, including high inflation, rising interest rates, and slowing economic growth. There is already evidence of stagnating economic growth in the US and China. China’s economic recovery is losing momentum due to weak domestic demand, rising unemployment, and a severe downturn in the property sector.
Germany, Europe’s largest economy, plunged into recession due to last year’s energy price shock, and a prolonged slowdown would pose problems for other regions that barely escaped a recession at the start of the year. France, which has enjoyed a strong economic recovery since the pandemic, is already slowing, indicated by a fall in consumer spending for the third month in a row in April.
Inflation has eased in Europe’s second-largest economy, mimicking the declines in Germany, Spain, and Italy. Data for May show inflation in the 20 euro-using countries has slowed consumer price gains down to a slower pace than in April when inflation soared to 7%. Inflation in the UK and US has also slowed, but remains uncomfortably high for central banks targeting 2% interest rates.
Inflation raises the price of commodities and services and slows down consumption. Meanwhile, rising interest rates push up loan and mortgage prices, weighing on business and household spending. Deutsche Bank predicts a wave of defaults among US and European companies due to the toughest monetary policy in 15 years, high debt levels, and falling profitability, with German analysts predicting the wave peaking in late 2024.
Unexpected shocks can make mild recessions worse, and while potential crises from two long-standing threats, the Ukraine war, and the climate crisis may arise, they do not appear to have originated within the US government. Ukraine is preparing a long-awaited counteroffensive against invading Russian forces, and Russian President Vladimir Putin has threatened retaliation for a rare drone attack on Moscow. Last year, the impact of the war pushed international food prices to record highs, with prices still rising in many countries, causing extreme hunger in poorer countries.
Spain is the world’s third-largest tomato exporter and produces wheat, barley, rice, and olive oil. About 60% of Spain’s countryside is affected by drought, causing crop failures and food shortages. Catastrophic flooding in northern Italy in May floods thousands of farms in an area of the country known as “Fruit Valley.” Another severe drought in southern Europe could make matters worse. Agricultural data provider Gro Intelligence says “arid soils and severe drought in Spain are damaging a wide range of crops and threatening high food prices in many EU countries.”