Don’t Count on a Soft Landing for the World Economy

Yet the world economy will remain fragile in 2024. Though inflation will be lower, it will remain too high. Economic policy still faces an excruciating balancing act. And even if America continues to dodge a recession, the rest of the world looks vulnerable. Inflation’s recent fall has been a relief to central bankers. But in big, rich economies it is unlikely to continue declining all the way to their 2 per cent targets unless a recession strikes. For one thing, labour markets still look too hot and nominal wage growth too high. For another, economies will have to contend with the effects of more expensive oil. Just when it seemed as if the supply shocks of the pandemic era and Russia’s invasion of Ukraine had dissipated, with supply chains unclogged and economies rebalanced, a barrel of oil has risen in price by about a third since the summer, thanks to production cuts in Saudi Arabia and elsewhere. A price fall was halted by Hamas’s attack on Israel. The resulting pricier petrol could raise fears of a “second wave” of inflation.

The major central banks will probably not raise interest rates further, instead treating any oil-driven inflation rebound as temporary. But, fearful of premature declarations of victory, they will not be keen to cut rates, either. On recent evidence America’s economy can withstand tight money, even if big companies refinancing debts and households who have run down their pandemic-era savings are beginning to feel squeezed. But high interest rates may be tipping the already-wobbly euro-zone economy into recession, and fear of inflation could stop its policymakers from cutting rates in response.