This undated photo from the Council on Foreign Relations shows Benn Steil. The Associated Press spoke to Steil, director of international economics at the Council on Foreign Relations, about the surprising resilience of the economy. Don Pollard, Council on Foreign Relations via `
WASHINGTON – Over the past year, the global economy has weathered the combined shocks of high interest rates and a war in Ukraine better than almost everyone expected.
The International Monetary Fund, among other agencies, has raised its economic forecast for 2022. Europe has defied fears that an energy shock from disrupting Russian natural gas would cause a severe recession. The US labor market remains overburdened.
The Associated Press recently spoke to Benn Steil, director of international economics at the Council on Foreign Relations, about the economy’s surprising resilience.
The interview has been edited for clarity and length.
Q: For the past year, the Federal Reserve and other central banks have been raising interest rates to fight inflation, and the war in Ukraine rages on. But the global economy is in better shape than expected. What happened?
A: Europe has performed more robustly than almost everyone expected a year ago. We also had a pretty impressive adjustment in the global energy market when liquefied natural gas came to Europe from the United States. It all happened more orderly than most observers expected. We’ve had unusually mild weather in the United States and Europe. Energy markets were the biggest upside surprise.
In the United States, you had an economy that was still fueled by the federal stimulus programs in 2020-2021. Now we clearly see that the rate-sensitive sectors of the economy are slowing down, particularly the housing market. But that hasn’t caught on with the broader economy yet. This year will no doubt be the case to a significant extent. The question that remains is whether this means the US economy will enter a recession later this year, or whether we can potentially avoid it altogether, or at least postpone it until 2024.
Q: What are the prospects for a soft landing – the Fed taming inflation with higher interest rates without triggering a recession?
A: It’s definitely looking better than last summer. It looks like there is a more realistic possibility.
Q: But what about persistent inflation?
A: Recent inflation data clearly supports those who have expressed concern that inflationary pressures are protracted. Despite the fact that we had declining inflation many months after the summer, recent data showed that the service sector has proved more resilient than inflation optimists had predicted.
Q: How could turmoil in the banking system affect the outlook for the world and the US economy?
A: If the Fed, Treasury and FDIC can’t calm markets quickly, it should certainly have an impact. Small and medium-sized banks will scale back lending, increase borrowing costs, reduce investment and curb spending. This would increase the risk of a recession and thus make the Fed’s decisions more difficult.
Today’s breaking news and more in your inbox
Comments are closed.