There’s a palpable mix of excitement and trepidation on the horizon, as investors pile into an asset they view as a haven amidst today’s turmoil. But with gold fever sweeping the markets, many are asking the following: What’s driving this boom, and could it all come crashing down?

A “perfect storm” of economic anxiety, geopolitical conflict, and shifts in monetary policy has burnished the yellow metal’s appeal. Fears of recession and inflation have grown, exacerbated by unpredictable policy moves, such as abrupt changes in US trade strategy, which rattled markets and weakened confidence in paper assets. Wars (whether trade or actual military conflicts) have further spooked investors and fuelled demand for the timeless safety of gold. In this climate of uncertainty, gold’s lustre as a store of value shines brightly once again.

Yet history teaches that what goes up can also come down. Previous gold booms, notably those in 1980 and 2011, were followed by painful corrections. So, is today’s rush for gold a prudent hedge or the makings of a bubble?

International Finance will examine the drivers of the current gold price boom, explore why gold is traditionally seen as a haven, consider the risks of investing amid the hype, weigh expert opinions on a potential bubble burst, and discuss strategies for navigating uncertainty in these volatile times.

Drivers behind gold’s record boom

Gold’s recent rally has been stunning in its speed and scale, and several key forces are behind it. Economic jitters and monetary policy shifts have played a leading role. Over the past year, investors have grown nervous about the global economy’s health.

In the United States, the world’s largest economy, flashing signs of a late-stage cycle include slowing growth, a softening labour market, and rising fears of an impending recession. Inflation, which spiked after the pandemic, remains a concern as well.

Gold thrives in such conditions because it is viewed as a hedge against inflation and currency weakness. Unlike cash, gold’s value cannot be eroded by central banks printing more money or by a surge in consumer prices.

Indeed, analysts point out that the cost of gold “tends to spike in times of high inflation and economic and geopolitical uncertainty.” As inflation fears rise, so does demand for the yellow metal, which is used to preserve purchasing power.

At the same time, monetary policy itself has boosted gold. After aggressively raising interest rates to combat inflation in 2022 and 2023, major central banks adopted a more dovish stance in 2024 and 2025. For example, the United States Federal Reserve halted its rate hikes and even began hinting at (or enacting) rate cuts as economic momentum faltered. Lower interest rates make non-yielding assets like gold more attractive than bonds or savings accounts, reducing the “opportunity cost” of holding gold.

It is no surprise, then, that gold’s price jumped in March 2025 immediately after the Fed signalled a pause, surging above $3,050/oz following a decision to hold rates steady. Expectations of global rate cuts have been a major tailwind.

“We reiterate our long gold recommendation due to the gradual boost from lower global interest rates, structurally higher central bank demand, and gold’s hedging benefits against geopolitical, financial, and recessionary risks,” Goldman Sachs noted.

With the prospect of easier money on the horizon, investors are preemptively moving into gold as a safeguard against any policy-driven currency debasement.

Geopolitical turmoil and uncertainty form the second key pillar of gold’s boom. In recent years, the world has witnessed a series of destabilising events, and gold often shines when confidence in governments or international stability wavers. One major factor has been the escalation of trade conflicts.

Under President Donald Trump, the United States unleashed waves of tariffs and trade threats, sparking a trade war that unsettled global supply chains and alliances. By early 2025, an aggressive new round of American tariffs on many of its main trading partners had investors on edge.

The recent surge in gold prices has closely mirrored the spike in global policy uncertainty, driven in part by fears of substantial tariffs and their potential inflationary consequences, as one analysis observed. Markets interpreted Trump’s erratic trade moves and even direct attacks on Federal Reserve independence as destabilising forces.

For instance, when President Trump lambasted Fed Chair Jerome Powell as a “major loser” on social media and demanded immediate rate cuts, it undermined confidence and sent shockwaves through financial markets. Stocks tumbled, the dollar’s value slipped, and gold promptly hit a fresh record high in the aftermath. This episode vividly demonstrated how political and policy drama can boost gold. When investors fear that policymakers might mismanage the economy or upend the status quo, many seek refuge in a tangible asset whose value is not at the mercy of any government’s decisions.

Beyond trade disputes, traditional geopolitical risks have also driven a flight to safety. Ongoing wars and international tensions, such as the conflict in Ukraine and flare-ups in the Middle East, have unnerved investors and spurred demand for gold, which is often viewed as crisis insurance.

Historical data show that gold’s price tends to rise during episodes of heightened geopolitical risk or military conflict, periods when stocks and even government bonds might fall. In such extreme moments of uncertainty (for example, the days after the 9/11 attacks or the outset of the COVID-19 pandemic), gold has proven its mettle by preserving value and rising in tandem with other havens like the American dollar. Today’s climate, marked by diplomatic rifts and security concerns, is a textbook case of investors hedging against worst-case scenarios.

Crucially, central banks around the world have themselves become major drivers of the gold rush, a relatively new dynamic that cannot be overlooked. Over the past few years, central banks, especially in emerging markets, have been voracious purchasers of gold, bolstering their reserves.

They have collectively bought more than 1,000 tonnes of gold each year since 2022, more than double the average annual purchases in the prior decade. In 2022, when Western nations froze Russia’s dollar reserves in response to the Ukraine invasion, many other central bankers had an epiphany.

“Reserve managers…realised, maybe my reserves aren’t safe either. What if I buy gold and hold it in my own vaults?” explained Daan Struyven, a commodities strategist at Goldman Sachs.

In other words, countries like China, India, Turkey, and Poland (all among the leading gold buyers) are hoarding gold to reduce reliance on the US dollar and the global dollar-centric financial system. The fear is that dollar assets can be “weaponised,” meaning turned into tools of sanction or pressure in times of geopolitical strife.

Gold, by contrast, is sovereign. Holding gold gives these countries an asset that no foreign government can seize or block, a form of financial security amid rising East-West tensions. This structural shift in central bank behaviour has added a steady, price-supporting demand for gold that many analysts say is “unlikely to reverse in the near term,” even if the pace moderates. In short, central banks are effectively building a golden buffer against geopolitical and economic shocks, and that trend has helped propel the market upward.

Finally, market sentiment and investor behaviour have amplified gold’s climb. Success begets success in financial markets, and the sight of gold repeatedly breaking records has triggered a classic case of FOMO, or fear of missing out. From small retail investors to large institutions, many are now scrambling to “get a piece of the golden pie,” as one bullion dealer observed.

Exchange-Traded Funds (ETFs) focused on gold have seen surging inflows, as they offer an easy way for people to buy into the rally without handling physical bars or coins. These investment vehicles have magnified demand. Large funds buying gold on behalf of investors further push up the price, which in turn attracts even more buyers in a virtuous (or vicious) cycle.

“Even a small move out of the big stock market or bond market means a big percentage increase in the much smaller gold market,” Struyven notes.

That is, the gold market is tiny relative to stocks or bonds, so it doesn’t take a huge reallocation of global capital towards gold to make its price jump dramatically. With market volatility elsewhere (stocks and bonds both had rocky periods recently), a modest shift in portfolios toward gold has an outsized effect on its valuation.

Additionally, some investors are seeking insurance against a scenario of stagflation, meaning simultaneous economic stagnation and high inflation, which is a nightmare for most assets but historically a favourable backdrop for gold.

As one commentary succinctly put it, with the risk of stagflation unsettling markets, many are “seeking refuge from both recession and inflation threats” in gold. In sum, a blend of fear and momentum has gripped the gold market, drawn ever more buyers, and fuelled the boom.

Corrections and pitfalls

With gold glittering at record highs and headlines touting its surge, it’s easy to get caught up in the excitement. However, investing in gold during a boom carries its own set of risks and potential pitfalls. For one, the possibility of a sharp price correction or even a bursting bubble looms large whenever any asset rises this far, this fast.

History provides a sobering precedent. The last time gold saw a mania comparable to today’s was in the late 1970s. Spooked by oil shocks and stagflation, investors drove gold to then-record heights in January 1980. But the euphoria didn’t last, as prices crashed violently thereafter. In 1980, gold plunged from a peak of $850/oz (about $2,684 in today’s dollars) to nearly half that value within just three months.

By mid-1981, it had decreased a staggering 65% from its peak. More recently, after gold reached another peak of around $1,900/oz in 2011, amid post-financial crisis turmoil and Eurozone fears, it also experienced a significant decline. Within four months, prices were 18% lower, and the slide continued for two years until gold was roughly 35% below its 2011 high. Investors who bought near those peaks and assumed gold “could only go up” nursed painful losses for years.

Could today’s rally meet a similar fate? It is certainly a risk to consider. Gold may feel solid and timeless, but its market price is volatile and driven by fickle sentiment as much as fundamentals.

A key danger is that many new investors are piling in due to hype or fear of missing out, rather than careful analysis. When an asset becomes a popular talking point at dinner tables and on social media, as gold has now in some circles, it often means a lot of momentum-driven money is at play.

These latecomer investors can quickly exit at the first sign of bad news, accelerating a downturn. Analysts caution that a bout of good news, such as easing geopolitical tensions or stronger economic data that reduces uncertainty, could prick the balloon. For example, one strategist noted that gold prices briefly fell 1.4% following news of a US-China tariff agreement that de-escalated trade tensions, highlighting the price’s sensitivity to shifts in the outlook. If we were to witness several positive developments, such as a lasting peace in a conflict or a strong global growth rebound, the very factors that drove gold prices up could reverse, potentially causing a significant decline in value.

Another risk factor is gold’s lack of yield or cash flow. Unlike a stock that pays dividends or a bond that yields interest, gold provides no regular income to its holder. Investors rely solely on price appreciation to earn a return.

In a booming gold market, that may not seem to matter, since the asset is climbing 40% in a year. But if the price momentum stalls or reverses, gold holders don’t have any interest or dividends to cushion their total returns. Furthermore, if interest rates were to rise again (for instance, if central banks tighten policy to fight inflation), gold could lose favour.

Higher interest rates increase the appeal of interest-bearing assets relative to zero-yield gold. This dynamic was one reason gold languished through much of the 1980s and 1990s when central banks under Paul Volcker and successors kept real interest rates high to rein in inflation. Indeed, an investor who bought gold in 1990 had to wait about 14 years before the price recovered to that level in real terms.

During such long flat stretches, holding gold can mean a significant opportunity cost. Money tied up in gold is money not invested in stocks, bonds, or other assets that might be growing or paying income. As The Independent noted in a recent analysis, these “missed opportunities” are a real drawback of over-allocating to gold. In other words, if you go all-in on gold and it does nothing (or declines) for a decade, you might regret not having put at least some of that money into assets that were flourishing during that time.

Investors must also consider practical challenges and costs associated with gold. Buying physical gold means dealing with storage, insurance, and security, which can be costly and inconvenient. While many people now opt for gold ETFs or other financial instruments to sidestep these issues, those come with their own fees and, in some cases, tax considerations.

Additionally, gold markets can be influenced by factors beyond the average investor’s control, such as central bank actions or fluctuations in jewellery demand in key markets like India and China. These factors can introduce volatility. And if the market turns, gold’s liquidity can also dry up; in a panic sell-off, finding buyers at the last high price is not a given.

All these points boil down to a simple warning that, even during a boom, investing in gold is not a one-way bet. The metal’s famed stability refers to its long-term retention of value, not short-term price stability.

As Susannah Streeter, head of money and markets at Hargreaves Lansdown, aptly put it, “Short-term speculating can backfire,” and those lured by gold’s record run should be careful not to put all their eggs in one (golden) basket.

Gold deserves respect as a haven, but chasing it at peak prices without regard for the downside risks is a recipe that could leave an investor feeling, in hindsight, that all that glittered was not gold.

The big question on everyone’s mind is: How long can this gold boom last? Opinions among experts are divided on whether the market is nearing a peak or just catching its breath before climbing further. Some observers indeed worry that gold has entered bubble territory and that a significant correction is inevitable.

Jon Mills, an industry expert at Morningstar, grabbed headlines recently by predicting that the price of gold could plunge to around $1,820/ oz in the next few years. Such a drop would cut gold’s value nearly in half from its recent highs, a dramatic reversal.

Mills argues that today’s high prices will eventually encourage greater supply, as miners increase production and more individuals sell or recycle old gold. At the same time, some of the short-term demand drivers are likely to diminish. In his scenario, supply and demand would rebalance. A greater flow of gold into the market, plus waning buying by central banks and investors once the current fears subside, could cause the price to retreat significantly.

It is worth noting that since making that bearish call, even Mills acknowledged reality has shifted a bit. Mining costs have risen, and inflation has stayed stubborn, leading him to revise his downside target upward slightly.

The core of the cautionary outlook is that if today’s “perfect storm” of drivers fades, gold could surrender much of its gains. Investors would do well to remember that no asset is immune to economic gravity. Caution, diversification, and a clear-eyed view of one’s goals are essential. Gold can be a prudent part of an uncertainty strategy, but it is not a guarantee against loss or a substitute for a balanced approach.

Ultimately, gold endures as a glittering reflection of our shared hopes and fears. Its boom today signals deep-seated worries about tomorrow. Whether or not the bubble bursts, the true value of gold will likely endure, but the journey could be volatile.

By understanding the forces at play and by hedging bets wisely, investors and the public can avoid turning a haven into fool’s gold. In these unpredictable times, that may be the most important investment advice to heed.

The post Is gold’s rise too good to last? appeared first on International Finance.

Now, talking about the yen, the Japanese currency has lost about a third of its value since the end of 2019, driven mainly by the wide gap in interest rates between Japan and the United States. There are reports about a weak yen cutting into Japanese travellers’ ability to spend abroad, as rising overseas prices and lower interest in international travel among younger generations appeared to be factors behind declining passport ownership in the Asian country, preventing a full rebound from pandemic-era lows.

Talking about the yen, the Japanese currency is the world’s third most traded one, accounting for 13% of global foreign exchange transactions in 2022.

“From March to August 2024, the yen experienced a rollercoaster of fluctuations, reflecting the high sensitivity of currency markets to both domestic policy changes and global geopolitical events. Key drivers included Japan’s shift away from its negative interest rate policy, interest rate hikes, and uncertainties surrounding a potential US recession. These fluctuations represent a new normal for the yen and explore its potential implications for the economic and geopolitical landscape in the Indo-Pacific region,” stated Dr Seohee Park, a postdoctoral research fellow at the Department of International Politics and Economy, Graduate School of International Cultural Studies, Tohoku University.

A turbulent 2024

Yen’s recent movements have been heavily influenced by geopolitical events like the Russia-Ukraine war and tensions in the Asia-Pacific region. The core of the yen’s recent volatility is the Bank of Japan’s (BOJ) monetary policy. In March 2024, the USD/JPY exchange rate ranged from a low of 146.92 to a high of 151.61, reflecting the yen’s depreciation.

Such a weak yen prompted the BOJ, under the leadership of Kazuo Ueda, to intervene in April to stabilise the currency. The central bank ended its negative interest rate policy that had lasted for eight years and increased interest rates for the first time in 17 years.

Despite these policy changes, the yen continued to weaken, reaching its lowest point on 9th July (161.60 yen to $1) since June 1986. Thus, the BOJ underwent another intervention on 11th July, spending up to 3.57 trillion yen ($30.11 billion) in the foreign exchange market to lift the yen from its 38-year low.

“The exchange rate peaked at around 161.90 in July, just before the yen appreciated significantly by over 12% following the central bank’s rate hike.

Throughout July to August, the yen moved from 161.99 on 3rd July to 141.66 by 5th August. This appreciation was partly due to the BOJ’s decision to raise interest rates to 0.25% and reduce bond purchases, which strengthened the yen against the dollar. However, the yen’s rapid appreciation on 5th August triggered a massive sell-off in the Japanese stock market, with the Nikkei Stock Average plummeting 4,451.25 points, or 12%, its worst-ever daily decline,” said Dr Park.

The above-mentioned sell-off was driven by concerns over a potential US recession and the yen’s strength, which could negatively impact Japanese exporters. Surprisingly, the market rebounded sharply, surging 3,217.46 points, or 10.2%. The rebound was attributed to strong US service sector data for July, which eased concerns about a recession and led to a correction in the dollar-yen rate.

In August, the yen’s value again fluctuated between 143.89 and 149.34, with an average rate of 146.63. This volatility occurred due to the interest rate disparity between Washington and Tokyo, as well as market reactions to a potential US economic downturn.

While the BOJ has been committed to yield curve control and ensuring ultra-low interest rates, these policy stances have played a central role in guiding the yen’s value. However, these accommodative approaches have also fuelled concerns about inflationary pressure, which has permeated Japan’s domestic economy and is evident in the recent surge in consumer prices, driven in part by rising food and energy costs.

While throughout 2024, the BOJ maintained its position that inflation was largely transitory, consumer confidence eroded too, as the ratio fell 0.27% from 2023, leading to a wage-price spiral. The BOJ faced a difficult balancing act: stimulating economic growth while keeping inflation under control.

Yen’s depreciation significantly impacted Japan’s export-oriented industries, particularly in the technology and automotive sectors. In May 2024, exports increased 11.9% compared with the same period in 2023, the highest growth rate since November 2022. The trend was also evident in the mid-August Nikkei rally, where major exporters such as Tokyo Electron, Sony, and Toyota led the gains.

The Nikkei Stock Average surged 3.5% on 13th August, boosted by a weaker yen after the Bon holiday. Still, a boost in exports was checkmated by shrinking sales figures, as global demand remained relatively soft.

“While the weaker yen has boosted Japan’s export-oriented industries, it is crucial to recognise the double-edged nature of this currency depreciation. Many Japanese small and medium-sized enterprises, especially in manufacturing with high dependence on imported energy and raw materials, are facing significant challenges due to increased import costs. This internal economic strain highlights the mixed effects of the currency’s fluctuations. The benefits of a weak yen are not well distributed across the Japanese economy and may come at a considerable cost to certain sectors,” Dr Park noted.

Listed companies’ financial statements for the fiscal year 2023–24 also showed them registering record-high profits due to the weak yen. However, the depreciation also led to a rise in prices for imported goods, amid tepid personal consumption.

Teikoku Databank conducted a survey looking at the impact of the weak yen on 1,046 companies from May 10 through 15, revealing that 16.0% had seen a “positive effect” on sales, 35.0% had experienced a “negative effect,” and 49.0% reported “no change.” In contrast, for profits, there had been a “positive effect” for 7.7%, a “negative effect” for 63.9%, and “no change” for 28.5%, meaning profits at two out of three companies were negatively impacted. Further, 31.7% saw negative effects on both sales and profits.

Even though it was impossible to avoid increases in raw material prices due to the weak yen, it became difficult for each company to reflect those increases in their products and services. Now the question is: why was the currency even falling?

The currency has been losing more than a third of its value since the beginning of 2021. Investors were selling the currency, and exporters were not feeling the need to convert foreign proceeds into yen, further decreasing the currency’s demand.

While the BOJ’s preference for keeping interest rates extraordinarily low to encourage more inflation in its economy (as well as to boost bank lending and spur demand) has been an open secret, in February 2024, widespread labour shortages and a weakening yen resulted in Japan being overtaken by Germany as the world’s third-biggest economy, as the Asian country slipped into recession.

The BOJ had to end its policy of keeping its benchmark interest rate below zero, lifting its short-term policy rate from -0.1% to between zero and 0.1%.
After that decision, markets were focused on the pace of further rate rises. Then the BOJ announced in April that it would hold interest rates steady, which resulted in another round of yen sell-offs, putting more pressure on the currency, as it went down to 160 against the dollar for the first time since 1990.

Yen’s warrior-like legacy

“The currency was born back in 1872, when Japan was brimming with optimism after the Meiji Restoration, abandoning centuries of isolation and encouraging modernisation. It was a currency that symbolised the identity of a newly self-confident nation embracing the wider world. Originally bound to the gold standard, it underwent major changes after 1945. With the world in chaos, the 1949 Bretton Woods system provided a lifeline for shattered economies desperate for stability. Under this new regime, the yen was fixed at 360 yen to the dollar, offering Japan security even if it constrained flexibility. In retrospect, this balancing act reflected the nation’s resilience,” Dr Park said.

By the early 1970s, “Bretton Woods” collapsed as the United States abandoned the gold standard, and Japan let the yen float freely in 1973. The resulting combination of uncertainty and potential generated substantial movements in its value. While the 1985 Plaza Accord intended to weaken the dollar, this triggered a chain reaction that severely affected the yen.

Trade tensions with Washington saw the currency’s value tumble to a low of 79.75 against the dollar by 1995. In response, Japan’s Ministry of Finance soon began directly buying and selling yen to stabilise its value and protect exporters from economic downturns.

Even though the yen going down to 160 against the dollar for the first time since 1990 should have created a panic-like situation in Japan, the currency, for a good part of its existence, has been operating amid headwinds like global financial crises and shifts in monetary policy.

As the Japanese proverb ‘fall seven times, stand up eight’ implies, responding with resilience is what counts for a currency.

“Over the years, the yen has exemplified this resilience, especially in uncertain times. From the fallout of the 2008 financial crisis, when it surged to around 90.87 against the dollar as investors ran for safety, to its role as a haven during the COVID-19 pandemic, the yen has proved itself. However, its apparent stability remains vulnerable to external pressures, particularly when other nations grapple with inflation: the 2022 uplift in US interest rates battered the yen and widened the yield gap between Japanese and US government bonds. This growing divergence in monetary policies has made the yen more volatile and more subject to investor sentiment,” noted Dr Park.

In September 2024, inflation in Tokyo met the BOJ’s 2% target, signalling a return to growth and the promise of further interest rate hikes. However, the yen was trading at about 147.83 to the dollar, the weakest rate in decades, as the country was dealing with geopolitical tensions, especially in the Asia-Pacific region, supply chain problems, and the decision to keep interest rates near zero, all contributing factors.

In 2024, Dr Park said, “Speculation about changes in Japan’s monetary policy suggests that the yen might bounce back, but with inflation creeping upwards and mounting global uncertainty, the situation is more precarious for consumers and policymakers alike, leaving the currency exposed. The defining moment came in July 2024 when the BoJ raised its short-term policy range from 0% to a tentative 0.1%. While a stronger yen may temper inflation, it may also dampen Japan’s export-driven economy.”

According to the “Economic Complexity Index,” Japan has remained the world’s most complex economy, due to its sophisticated infrastructure, diverse export base, advanced industrial sector, and leadership in technologies like electronics, robotics, and automotive manufacturing. Nevertheless, Japan’s low interest rates, domestic inflation challenges, and total reliance on energy imports in a highly volatile global energy market all continue to influence the yen’s value.

The widening gap between Japanese rates and those of other major economies prompted the yen’s slide to a 24-year low: 132 against the dollar. JP Morgan, while analysing the massive USD/JPY differential, stated that the yen is influenced by market expectations of US Federal Reserve policy rather than by the actions of the BOJ.

“While BoJ interventions could create short-term risks, they are unlikely to affect the main factors driving the yen’s depreciation. Despite the bank’s recent departure from negative interest rates, the yen remains tied to the US economy, as shown by a strong rally after a US CPI report in March 2024,” Dr Park remarked.

What awaits the Yen in 2025?

In January 2025, the BOJ increased the key benchmark interest rates by a 25-basis-point rise to 0.5%. While the decision indicates that the Japanese economy is developing as expected after the high inflation reading, this rate hike fuelled the yen to trade higher against the dollar.

On February 24, the yen rose in Asian trade, on track for the fourth straight profit against the dollar, hitting a 12-week high on strong investment demand. The central bank’s Vice-Governor Riyuzu Himuno said the path of monetary policies will depend on data, especially wage growth in both 2024 and 2025.

As per the recent data, Japan’s GDP growth accelerated in Q4, in turn raising pressures on BOJ policymakers. The odds of a BOJ March 2025 interest rate hike rose by 0.25% to 80%. The currency, meanwhile, has strengthened to around a two-month high against the dollar in the 149 zone.

Investors, in February 2025, snapped up the yen, pushing it to 149.95, as stronger-than-expected GDP data fuelled speculation of further BOJ tightening, lifting Japan’s benchmark 10-year government bond yield to a fresh 15-year high.

In the opinion of Sayuri Shirai, a former member of the central bank’s board, the BOJ could increase interest rates in March if US President Donald Trump implements his proposed tariffs, intensifying domestic inflation.

“At the start of February, new tariffs on imports from Canada and Mexico were delayed for a month. However, a 10% tariff on all Chinese imports has been implemented. These tariffs could escalate global inflation,” Shirai noted.

Shirai indicated that the BOJ is likely monitoring the tariff situation closely. March could be an appropriate time to increase rates, given the current high domestic inflation. Despite the broader Japanese economy’s weakness, Shirai told investing.com that the central bank must continue to raise interest rates to counter the weak yen and to combat rising costs of food and energy.

Shirai concluded by stating that Japan is experiencing cost-push inflation largely due to the weak yen. If this weak yen is exacerbating inflation and causing significant issues for Japan’s economy, the BOJ should acknowledge this and continue to raise rates.

The post Why is Yen turning heads now? appeared first on International Finance.

Donald Trump is correct when he says that tariffs can help achieve most, if not all, of those goals. When applied correctly, tariffs can increase domestic output by raising the cost of imported goods. The United States could use tariffs to seriously harm other nations’ economies without entering a recession, as America’s economy is vast and diverse and does not depend as heavily on trade as its neighbours. Some of its deficits could be partially mitigated by the revenue generated from tariffs.

However, as the saying goes, if something seems too good to be true, it generally is.

Donald Trump’s strategy is flawed because tariffs cannot accomplish all of these objectives simultaneously. This is due to Trump’s often incoherent goals.

For example, if tariffs are part of a pressure campaign, they must end as soon as the countries agree, so there will be no more tariffs to balance the trade. Tariffs cannot increase revenue to offset deficits if they are intended to support America’s manufacturing sector. If Americans choose to purchase items made in the US, then who will be responsible for paying the tariff on imported goods?

Furthermore, Donald Trump’s proposed tariffs may hurt the US economy more than they will benefit. Recently, Trump admitted that tariffs would create a “disturbance.” Additionally, equities fell on Monday when Trump refrained from predicting that his trade policies would prevent America from entering a recession.

For several reasons, Donald Trump seems committed to enacting massive tariffs on goods manufactured abroad, starting on April 2, despite repeated postponements and withdrawals.

Increasing Income And Jobs In Manufacturing

During his joint address to Congress last week, Donald Trump declared, “We will take in trillions and trillions of dollars and create jobs like we have never seen before. The goal of tariffs is to restore America’s wealth and greatness.”

According to the Committee for a Responsible Federal Budget, Trump’s tariffs on Canada, Mexico, and China would generate roughly $120 billion annually and $1.3 trillion over a ten-year period.

One of Donald Trump’s main arguments for tariffs was highlighted in his joint speech to Congress: “We want to cut taxes on domestic production and all manufacturing,” he stated. However, under the Trump administration, “you will pay a tariff and, in some cases, a rather large one if you don’t make your product in America.”

Donald Trump claims that this trade policy, which uses rewards and penalties, would revive the manufacturing sector in the United States.

Extended tariffs have significant consequences for American businesses, consumers, and the US economy as a whole. Investor concern about the possibility of tariffs slowing down economic development is reflected in the latest market selloff. Tariffs can lead to lower investment, higher consumer prices, and strained international relations by increasing costs for companies reliant on imported goods.

These factors combined increase the likelihood of a recession. Businesses depending on global supply chains could see their production costs rise due to levies on imported parts.

Higher consumer prices, reduced competitiveness of American goods overseas, and potential job losses in sectors unable to absorb the higher costs could follow. Tariffs are essentially taxes on imports, and firms typically pass these expenses on to consumers. This leads to higher prices for a range of products, thus limiting customers’ purchasing power and possibly slowing down overall economic growth. Strong tariff rules can sour relations with important trading partners and allies, fragmenting the global trade landscape. Such fragmentation can complicate global cooperation on broader geopolitical and economic concerns.

Trump’s Tariff Plan And Its Potential Impact On Revenue

President Donald Trump’s tariff plan is expected to generate so much revenue for America that income taxes will no longer be required of its citizens.

The issue, however, is that America imports around $3 trillion worth of goods annually and collects about $3 trillion in income taxes annually. Therefore, for tariffs to replace income taxes, they would need to be at least 100% on all imported items. This would be an excessive amount that would shock American consumers with higher prices.

Accusation Of Unfair Practices

President Donald Trump has repeatedly claimed that numerous nations use unfair trade policies that harm the United States. To assess these assertions, it’s important to examine trade balances and practices with key partners.

With a trade deficit of $310.8 billion in 2020, the US trade imbalance with China has long been a source of concern. China’s industrial policies, currency policies, and market access limitations have all been blamed for this disparity.

Under the North American Free Trade Agreement (NAFTA), trade between the US, Canada, and Mexico grew notably. Although the United States has trade deficits in some areas with both nations, these deficits are relatively small. While opinions on fairness remain unresolved, the renegotiated United States-Mexico-Canada Agreement (USMCA) sought to address some of these issues.

At $23.8 billion in 2020, the US had a trade imbalance with India. Points of dispute have included issues such as intellectual property rights, market access, and tariff and non-tariff barriers.

In 2020, the US trade deficit with the European Union came to $184 billion. Disputes over tariffs on certain goods, regulatory rules, and subsidies have led to ongoing talks and occasional trade conflicts.

Although trade imbalances exist, they are shaped by many factors, including variations in savings and investment rates, currency values, and comparative advantages. Calling these disparities the result of unfair behaviour oversimplifies complex economic linkages.

Donald Trump has stated that his 25% tariffs on Canada and Mexico, which have been mostly postponed, and his 20% tariffs on China are intended to pressure those nations to stop the flow of illegal immigrants and fentanyl into the United States.

Most economists agree that trade imbalances are neither losses nor subsidies. In fact, they may indicate a strong economy.

However, Donald Trump may not be trying to destroy the global economy through protectionism but rather seeking to bring all parties to the table to renegotiate long standing terms using economic threats. As someone who takes pride in his negotiation skills, there is a good chance that he might not follow through with his threats if he can secure deals that are even slightly better for the US.

Regardless, the great powers will reluctantly have to comply with Donald Trump, as he controls the world’s wealthiest economy (which everyone wants access to) and the US Navy, which protects merchant vessels on maritime routes worldwide. This is an expensive exercise that the US has been conducting almost exclusively since World War II, and without it, the global economy would likely collapse.

But if taken at face value, tariffs are unlikely to reduce the US-foreign trade imbalance. If this occurs, America’s purchasing power may decline.

The post IF Insights: Analysing the fairness & effectiveness of Donald Trump’s trade war appeared first on International Finance.

With its abundance of natural resources, Argentina was undoubtedly one of the richest countries in the world a century ago. However, following the Great Depression, successive governments adopted unsustainable, populist spending plans that led to years of political and economic instability, exacerbated by corruption, record inflation, and the country’s designation as the largest debtor to the International Monetary Fund (IMF). The nation was crying out for change due to a suppressed economy and 27 million people, or 57.4% of the total population, living in poverty.

Enter Javier Milei, a libertarian, revolutionary professor of economics.

He declared, “We are the only political force with a specific plan to end inflation, unemployment, issues related to health, education, food, housing, and all the debts Argentine democracy owes the Argentines.”

What exactly is libertarianism?`

Libertarianism is defined as “a political philosophy that takes individual liberty to be the primary political value,” according to the Encyclopaedia Britannica. To put it another way, individuals are in complete control of their lives and are held accountable for their decisions.

“Private property, markets free from state intervention, free competition, and the division of labour and social cooperation, in which success is achieved only by serving others with goods of higher quality or at a better price” are the fundamental tenets upon which libertarianism is built.

Putting a radical concept into action

Javier Milei’s election manifesto centred on radical changes to end Argentina’s economic instability, including a complete overhaul of the state, a 15% GDP cut in public spending and tax cuts, the elimination of the central bank, and “dollarisation” of the economy to stabilise inflation.

He also proposed the closure or privatisation of state-run businesses and organisations that he claimed “serve as shelters for people receiving salaries without contributing meaningful work,” as well as a reduction in business red tape.

His anti-establishment rhetoric, which positioned him as an outsider, struck a powerful chord with the disenchanted electorate, particularly those living outside major cities, who felt ignored by the political establishment and were tired of the status quo and the legacy policies of former President Juan Perón.

They regarded Milei’s promises of radical economic transformation and his pledge to overthrow a “corrupt and inefficient state” as a ray of hope against skyrocketing inflation and falling living standards. His support varied demographically, even though he defeated his closest opponent by a margin of 55.7% to 44.3% and won in 21 of the 24 provinces.

With the most support from younger men and significant backing from middle- and upper-class voters, his libertarian, free-market views were especially appealing to younger voters who thought the current economic crisis was endangering their future. However, his socially conservative views on abortion and other matters worried many women voters, who were less sympathetic.

Has much changed in a year?

Regrettably, not quite yet. No star will be born and no miracle will happen overnight, no matter how bold the claims are. Economies are not like Broadway shows. However, a few days after taking office, Milei got to work addressing Argentina’s financial issues and shrinking the state, which he believed were essential to reaching his objective of a budget surplus.

He lowered state subsidies for transportation and gasoline, cancelled all new public works contracts, terminated 30,000 public jobs, depreciated the peso by 54%, and trimmed the number of cabinet departments from 18 to 9. This led to the first budget surplus since 2008, at 275 billion pesos ($284 million) in Q1 2024, or 0.2% of GDP. As of the time of writing, Argentina has had a government budget surplus every month of 2024.

Additionally, the IMF has provided $4.7 billion in loans to assist these budgetary measures, even though Milei has had to temporarily back down on his election pledges to dollarize the economy and dismantle Argentina’s central bank. Investor confidence has been bolstered by this turn to more conservative economic policies, as evidenced by the 7% increase in Argentina’s international bonds due in 2041 that followed his victory and the 60% rise in index-level bonds by March 2024.

Austerity measures and currency depreciation have contributed to the economy’s continued decline into depression. Milei did caution that things would probably get worse before they got better when he took office, and despite these seeming early victories, he has nonetheless had a difficult first year. Even with consecutive monthly declines, the core inflation rate is still more than 200%, having peaked at 300% in March 2024.

Over 60% of Argentines now live in poverty, up from 41.3% in the second half of 2023, according to the Instituto Nacional de Estadística y Censos República Argentina (INDEC).

According to August 2024 figures, the cost of a total basic basket (CBT), which includes food and non-food essentials, has increased by 230.1% year-over-year. As if that weren’t enough, government data released in September revealed a third quarterly drop, further contributing to the economy’s decline into depression as a result of the currency devaluation and austerity measures.

Argentina has witnessed severe social upheaval, occasionally involving violence, mostly from left-wing parties and marginalised people who are frustrated with Milei’s cuts to welfare programmes and the closing of public agencies like the official news agency. Continuous opposition challenges, however, are not entirely the fault of Milei and his initiatives.

The largest obstacle to his intended reforms has been the opposition of adversarial politicians in both houses of the Argentine government. Although he garnered a sizable majority of the presidential vote, his party, La Libertad Avanza (LLA), only secured seven of the Senate’s 72 seats and 15% of the Chamber of Deputies’ seats.

He bypassed the Chamber of Deputies and expedited the measures he believed were needed to “consolidate economic stability” by issuing an emergency decree (DNU 70/2023) ten days after taking office in December 2023, while Senate confirmation was still required.

Deregulation of energy, transportation, healthcare, and other sectors; the elimination of price controls; the removal of workers’ rights (including the right to strike); and the facilitation of the privatisation of state-owned companies were among the more than 300 legal revisions included in the decree.

Along with a strong legal and political backlash, this led to widespread voter protests. Javier Milei claimed that senators were more focused on safeguarding their own interests than advancing Argentina’s chances when the Senate rejected DNU 70/2023 in March 2024. He insisted that the decree remain in effect until the lower house rejected it or the courts ruled it unconstitutional. His omnibus bill, which was also proposed in December 2023, was a considerably more comprehensive legislative reform package that had over 600 articles aimed at restructuring Argentina’s economy through fiscal restraint, deregulation, and privatisation. Both houses rejected it in its original form after it generated significant controversy.

Just 45 days into Milei’s administration, it also sparked a 12-hour general strike in Buenos Aires in January 2024, organised by the General Confederation of Labour (CGT), the umbrella union, in protest of the proposed reforms. After extensive revisions, the bill passed the Chamber of Deputies in late April.

While it still aimed to curtail the role of the state in the economy, in line with Milei’s libertarian philosophy, it had fewer articles—just over 300—and some of the measures—particularly those pertaining to the labour market—were loosened. A political standoff resulted from the Senate’s ongoing deliberations in a tumultuous political environment.

Javier Milei presented the May Pact, a 10-point agreement that promised additional tax changes and provincial fiscal balance, in an attempt to garner support. After the Senate passed the trimmed Omnibus Bill in June, Milei finally signed the May Pact in July. He unveiled his 2025 budget ideas in September. The zero-deficit approach aimed to stabilise the economy by focusing on determining the available funds before allocating them. However, to accomplish this, he also suggested making large cuts to public spending, especially on social programmes and subsidies, which alarmed opposition parties and social groups.

Despite Argentina’s current recession, the budget also projects a 5% GDP growth in 2025 and a sharp decline in annual inflation from the current 230% to 18.3% by the end of the year, with monthly inflation falling to 1%.

The administration believes that fiscal restraint and these austerity measures will hasten the economy’s recovery. Don’t weep for Argentina’s Milei. While investors have reacted warily to the idea, with many seeing it as a step toward restoring market confidence in Argentina, opposition parties have harshly criticised the proposals, accusing Milei of further harming the working class with large public spending cuts.

The public response has been mixed. While Milei’s supporters welcome the proposed measures, many are concerned about the potential impact of significant spending cuts on society. Despite the attention his libertarian agenda has received in its first year, Milei has faced strong opposition from rival parties due to the absence of a government majority.

Unfortunately, public dissatisfaction has led to his early popularity with the electorate declining. Change cannot come quickly enough for the people of Argentina, and if given the chance, Milei’s reforms should have the intended impact, and things will improve.

El Loco gets a boost

On January 26, came the biggest endorsement of Milei’s radical reform policies, in the form of a credit rating upgrade by Moody’s. The Southern American country’s credit rating was raised on the back of improved government finances. Moody’s also raised its outlook on South America’s second-largest economy.

Moody’s now sees less risk of the Latin American economic major entering a debt default, thereby upgrading the country one notch to Caa3 from Ca and boosting its outlook to positive from stable. While Argentina’s new rating remains in junk territory, the upgrade represents the first in five years and most importantly, gives Milei a potent weapon against his detractors.

“Argentina’s credit fundamentals have improved over the past year, as a result of the effective and forceful policy adjustments that have led to a stabilisation of the macroeconomic environment,” Moody’s said, while noting other factors like cooling inflation, reduced government spending, and narrowing deficits.

These developments have brightened the debt outlook as well. After debt reached 156% of GDP in 2023, Moody’s estimated it sank to 77% in 2024 and predicted it would plunge further to 50% by 2026.

Javier Milei’s free-market shock therapy for Argentina, which has historically been plagued by high inflation, anaemic growth, onerous red tape, and debt defaults, has earned him the nickname “El Loco,” or “The Crazy One.” However, “El Loco” has found a new fan in the form of American tech maverick Elon Musk.

As he attended Donald Trump’s inauguration in January, Elon Musk boasted to the media about effecting massive spending cuts and government layoffs, apart from eliminating more than 900 regulations. Among these was the rule that guaranteed the children of some government workers their jobs after their parents died. Another cancelled regulation was one governing the sale of “normal” potatoes, which allowed vegetable stands to receive a bonus.

In September 2024, Musk even stated that his companies were looking for ways to invest in Argentina and support the South American country’s economic recovery.

Javier Milei established a Ministry of Deregulation and State Transformation, which may have inspired Elon Musk to later create the Department of Government Efficiency (DOGE) during the Trump administration. While Milei’s abrupt cuts to government spending initially caused the economy to contract by 3.5%, it experienced a swift rebound with a subsequent growth of 3%.

“A tax amnesty that helped bring USD 20 billion in assets from abroad and new measures to attract foreign currency inflows have allowed Argentina to build up its international reserves,” Moody’s added.

“The forceful shift in fiscal and monetary policies, the stabilisation of external finances, and the adoption of market-oriented reforms have boosted domestic private sector confidence and rekindled dynamism in domestic credit and financial markets,” the ratings agency noted.

However, Moody’s pointed to the easing of capital controls without sparking sudden volatility in inflows or outflows. Too much optimism could also overstimulate the economy and create other imbalances. Still, a new deal with the International Monetary Fund (IMF) would further bolster investor sentiment and help diversify Argentina’s funding sources, which could feed into key growth sectors of the economy.

“An acceleration of foreign investment inflows related to various projects in the energy sector to tap into the country’s vast natural hydrocarbon resources would improve Argentina’s medium-term export and growth prospects, further strengthening the sovereign credit profile,” Moody’s said.

Worries remain

Javier Milei’s cost-cutting drive to achieve economic efficiency for the Latin American major has come at a cost: a punishing recession, an increase in unemployment, and a fall in real wages across both the public and private sectors.

Poverty surged to 53% in the first half of 2024, up from 40% in 2023, the highest recorded jump in two decades. It has since dipped slightly to 50%, although the number of people estimated to be living in extreme poverty remains above 6 million. Nearly seven in ten Argentinian children are growing up poor, up slightly compared with 2023, according to UNICEF. And one million boys and girls are going to bed every night on an empty stomach.

Sergio Chouza, the economist behind local consultancy Sarandi, said, “Nothing about the current disinflationary dynamic has much bearing on the quality of life for families or the purchasing power of workers.”

Demand at food distribution centres and soup kitchens has surged across the country. Meanwhile, working-class Argentinians continue to be battered by the elimination of energy and public transportation subsidies, which has led to ballooning bills.

Will things improve? According to the World Bank, consumer spending and manufacturing are showing gains. In September 2024, wage growth outpaced inflation for the sixth consecutive month. Overall, it is estimated that 2025’s recession will give way to a 5% economic expansion.

“This is Argentina. The country is still in a tough situation. But you have to understand what the baseline was. The economic crisis inherited by Milei was like a bomb waiting to explode,” said Juan Ignacio Carranza from Aurora Macro Strategies, while interacting with Aljazeera.

“Economic activity and purchasing power from citizens haven’t improved yet… It’s still a very fragile situation. But now we at least have a path [forward],” he added.

Notably, Milei’s approval ratings remained relatively stable throughout his first year in office, a luxury that his three predecessors didn’t have.

According to pollster Poliarquia, Milei concluded his first year as president with 56% approval, up from 52% a month prior.

Javier Milei has been able to push through his policies despite his party having only a small minority of federal lawmakers, while not having provincial governors countrywide. The passing of a signature legislative package in 2024 aimed to boost growth and raise revenue required political pragmatism, with Milei backing a watered-down version of the original bill to get support from other parties.

“How he is managing the political situation has been the most surprising thing for all of us. Being in a really weak position with no support in Congress… I think that’s been his biggest success,” Carranza added.

However, Milei’s economic achievements in his first year are not necessarily indicative of future growth, as, in the words of Camilo Tiscornia, an economist and the director of the Argentine consultancy C&T Asesores Económicos, “The end result in terms of productivity, consumer spending, and investments all depends on how the private sector reacts to the new political economy. In other words, the government can’t decide when the economy will grow.”

The coming years will determine whether Milei’s gamble pays off. If inflation drops and growth returns, he may be vindicated. However, if economic pain continues without clear improvement, disillusionment could lead to political instability or a reversal of his policies. Libertarianism, in theory, champions free markets and individual prosperity, but its real-world application in Argentina remains uncertain.

Ultimately, Javier Milei’s success will depend on whether his vision can translate into tangible improvements for the Argentine people. If his reforms take hold and economic conditions improve, he may be remembered as a transformative leader. If not, his presidency could be seen as another chapter in Argentina’s long history of economic turmoil.

The post Has Argentina’s risk of libertarianism paid off? appeared first on International Finance.

The IMF’s press release summarised the key points discussed during the consultation: OPEC+ production cuts have put the economy in a recession, but the non-oil sector is rebounding and inflation is decreasing.

A 4.3% drop in the oil sector and a 1% contraction in the non-oil sector were the main causes of the 3.6% real GDP contraction in 2023. Real GDP shrank 1% year over year in the second quarter of 2024, with the oil sector declining 6%, partially offset by a 4% recovery in the non-oil sector.

In September 2024, headline CPI inflation further moderated to 2.6% after dropping to 3.6% in 2023. Financial stability is unaffected, although Kuwait’s external and fiscal balances have been weakened by lower oil production and prices.

The current account surplus moderated to 31.4% of GDP in 2023, indicating that the external position is still strong. By the end of 2023, official reserves totalled USD 47.6 billion, which was enough to cover projections for imports for 9 months.

The central government’s fiscal balance changed to a 31.1% GDP deficit in the fiscal year 2023–2024. Nonetheless, the overall fiscal balance of the government, which includes the income from SWF investments and the profit transfers from SOEs, remained robust at 26.1% of GDP.

In 2023, banks maintained strong capital and liquidity buffers, and non-performing loans (NPLs) remained low and well-provisioned, despite a slowdown in credit growth brought on by higher interest rates.

As a result of ongoing production cuts by OPEC+, Kuwait’s economy is predicted to remain in recession in 2024, contracting by 20.8%, before gradually improving.

As the cuts are unwound, real GDP growth is anticipated to reach 2.6% in 2025. Despite fiscal consolidation, the non-oil sector will continue to recover, with real credit growth increasing and non-oil GDP growing by 2.0%.

The post Kuwait GDP to contract in 2024, rebound expected in 2025, predicts IMF appeared first on International Finance.

The prognosis for a recession has been erratic recently, with worries peaking early and subsiding as contradictory assessments on the state of the American economy emerged. Some economists are comfortable disregarding the inverted yield curve and the Sahm Rule, two classic instruments for predicting recessions, amid this whiplash.

Since the COVID-19 outbreak began to recede, economists have speculated whether the US economy would experience a recession. As the economy expanded and prices rose quickly in 2021, their arguments gained traction. A significant economic downturn usually follows a period of rising inflation.

Since then, inflation has decreased to levels similar to those before the pandemic, although a recession is still a possibility. Economists find some of their traditional instruments less helpful as they venture into uncharted territory because the current economic conditions differ greatly from previous recessions.

A jittery bond market

The bond market is the most consistent source of recession worry. The yield on two-year Treasury bonds has been greater than the yield on 10-year Treasury bonds since July 2022. In a healthy economy, longer-term securities typically have higher yields than short-term ones, not the other way around. The yield curve inverts when investors anticipate a recession.

Bond dealers are anticipating a recession and accept lower yields on longer-term debt. One is that they believe the Federal Reserve, which frequently lowers interest rates during recessions, will eventually reduce its benchmark interest rate.

Lower Fed rates are imminent. Fed Chair Jerome Powell recently stated that the moment had come for policy to change, as the labour market was cooling and inflation remained low.

The Fed has gradually raised its significant Fed funds rate from near zero since March 2022. To discourage borrowing and spending, slow the economy, and stop runaway inflation, this has increased the cost of borrowing for credit cards, mortgages, auto loans, and other debt. The Fed raised interest rates to their highest level since 2001 in July 2023, and they have remained at that level ever since.

Since then, inflation has decreased almost to what it was before the COVID-19 pandemic. It would be historically unusual if inflation dropped to the Fed’s target 2% yearly rate without causing an economic meltdown. A recession typically follows a Fed rate hike aimed at curbing inflation.

Nevertheless, it’s plausible that bond investors are bracing for a “soft landing” instead of a recession.

CIBC analyst Avery Shenfeld commented, “Investors, as a group, aren’t buying into the US recession thesis at this point.”

Rather, he believes that the market’s actions align with the idea that rates are down due to the defeat of inflation and that a relaxation of policy would prevent a complete economic collapse.

By September 2025, the Fed funds rate is expected to be in the range of 3% to 3.5%, according to the CME Group’s FedWatch programme, which predicts changes in the Fed rate based on Fed funds futures trade data. The Federal Reserve has historically lowered the Fed funds rate to near zero to inject easy money into the economy during recessions.

Enters the Sahm Rule

The Sahm Rule, which bears the name of its author, economist Claudia Sahm, is another formerly trustworthy indicator.

The rule is predicated on the finding that previous recessions have been preceded by a specific spike in the unemployment rate that rapidly spirals out of control and results in a mass loss of jobs. The Department of Labour released a report in August 2024 that indicated the unemployment rate had increased to the point where the Sahm Rule took effect.

This is bad news for the economy because, over the past 50 years, the Sahm Rule has proven to be accurate when applied to recessions. However, several economists, including Sahm herself, doubt that there has been a real economic slowdown.

“Contrary to the historical signal from the Sahm Rule, we are not currently in a recession, but the trend is moving in that direction. There is significant room to cut interest rates, and a recession is not inevitable,” Sahm told CNBC.

During previous recessions, firms laid off employees, which increased the unemployment rate. This time, more people are looking for work, which has contributed to an increase in the unemployment rate, which simply indicates the number of job seekers without employment. Storms in July may also have caused a brief increase in it.

When he lowered his prediction for the recession to 20% at some point in the upcoming year from 25% earlier this week, Goldman Sachs chief economist Jan Hatzius rejected the applicability of the Sahm Rule to the current circumstances. He pointed out that countries like Canada have recently had notable increases in their jobless rates without experiencing the total collapse of their economies.

Might there be a fire?

According to economist Richard M. Salsman of the libertarian think tank American Institute for Economic Research, the ongoing yield curve signal and the Sahm Rule’s recent warning should be taken seriously.

In a week-long commentary, Salsman said, “The two measurements together are significant and informative. We receive two signals: one indicates that a recession is approaching, and the other suggests it will occur within the next 12 to 18 months. The knocks on doors are growing louder and more forceful. There is something in the world.”

Financial markets closely monitor every new report for indications that either side is correct. Early in August 2024, the S&P 500 stock index experienced a significant decline as several indicators suggested the economy slowed down. In the following weeks, the market rose as inflation and retail sales data reduced the likelihood of a recession.

As long as the outlook for a recession remains uncertain, this whiplash could persist. More unexpected developments may occur before interest rates stabilise at a new normal. The Fed’s high interest rates have already had wide-ranging effects, including fuelling an unexpected wave of bank failures last year.

While some economists, such as Salsman, urge caution, interpreting these signals as signs of an impending downturn, others remain optimistic that inflation control efforts and potential interest rate cuts will prevent a major economic collapse. The financial markets, reflecting this uncertainty, have experienced fluctuations as data points like inflation and retail sales bring hope of stability.

Furthermore, the current economic climate has prompted some analysts to consider alternative indicators that might provide a clearer picture of what lies ahead. For instance, consumer confidence indexes and business investment trends are closely watched as potential harbingers of economic health.

Recent data shows that consumer spending has remained robust, buoyed by a strong labour market and wage growth. This resilience in consumer behaviour suggests that households still have the financial capacity and willingness to spend, which could help sustain economic growth despite other warning signs.

Additionally, the housing market offers mixed insights. While higher interest rates have cooled housing demand to some extent, leading to a slowdown in new construction and sales, housing prices in many regions remain elevated due to limited supply. This indicates that the market is adjusting rather than collapsing, which differs from patterns observed in previous recessions where housing market downturns significantly contributed to economic declines.

Another factor to consider is the role of technological innovation and its impact on productivity. Sectors like artificial intelligence (AI), renewable energy, and biotechnology may drive new waves of economic growth. Innovations in these fields may offset negative economic forces by creating new industries and job opportunities, thereby supporting overall economic stability.

Global economic conditions also add layers of complexity to the US outlook. Supply chain disruptions have eased (barring the aviation sector) compared to the peak COVID period, but geopolitical tensions, such as trade disputes and conflicts, continue to pose risks.

The interconnected nature of global markets means that economic slowdowns in major economies like China or the European Union could have ripple effects on the American economy. Conversely, coordinated international efforts to stimulate growth could provide a supportive backdrop for the world’s largest economy.

Labour market dynamics further complicate the picture. The unemployment rate has risen modestly, but job openings remain plentiful, and employers report difficulties filling positions. This suggests that the labour market is experiencing a rebalancing rather than a contraction. Structural shifts, such as increased remote work and changing worker preferences, may be influencing employment patterns in ways that traditional indicators do not fully capture.

As the debate intensifies, it becomes clear that the US economy is in an unprecedented situation. The post-pandemic recovery has shifted the dynamics, making some of the most trusted recession indicators less effective in predicting the current economic trajectory. Analysts and policymakers are caught between traditional economic wisdom and a new reality where factors like high inflation, fluctuating unemployment rates, and global economic conditions defy expectations.

The Federal Reserve’s cautious approach to adjusting interest rates, alongside mixed signals from the bond market and employment reports, has left economists divided on whether a recession is imminent or if the economy can manage a “soft landing.”

Financial institutions are also better capitalised compared to previous economic downturns, thanks in part to regulatory changes implemented after the 2008 financial crisis. This improved financial stability reduces the likelihood of a banking crisis exacerbating any economic slowdown.

However, higher interest rates have increased borrowing costs, which could strain businesses and consumers with high levels of debt, potentially leading to increased default rates if economic conditions worsen.

In light of these multifaceted factors, some economists advocate for a more nuanced interpretation of the data. They suggest that while caution is warranted, the economy may be transitioning to a new equilibrium rather than heading toward a recession. This perspective emphasises the adaptability of the economy and the possibility that it can adjust to challenges without experiencing a significant downturn.

Ultimately, the path forward may depend on the agility of policymakers and the private sector in responding to emerging trends. Proactive measures, such as targeted fiscal stimulus, investments in infrastructure, and policies that support workforce development, could bolster economic resilience. Collaboration between government, industry, and communities will be crucial in addressing both immediate concerns and long-term structural challenges.

The post Recession signs: Are they just false alarms? appeared first on International Finance.

Germany Economy Minister Robert Habeck said that his government’s forecast for 2024 growth had been revised down from 1.3% to 0.2%. In contrast, the United States economy is predicted by the International Monetary Fund (IMF) to grow by 2.5% in 2024, while China’s economy is predicted to grow by 5%. Germany’s plight, described by Habeck as “dramatically bad,” is also hurting the European Union’s economic health.

The country has been severely impacted by the rise in energy prices, since Russia’s invasion of Ukraine in 2022. Significant inflationary pressures have affected the efficient production processes of German companies.

German businesses are finding it more difficult to obtain funding due to rising interest rates, which have also increased their operating expenses and decreased both domestic and foreign demand.

Additionally, China has decelerated and begun to make investments toward self-sufficiency, lessening its reliance on imported goods and services as well as foreign technology. For German businesses that have heavily depended on the Chinese market over the previous 20 years, this is undoubtedly a problem.

According to the IMD World Competitiveness Ranking, Germany has been slipping behind other leading economies. Placed fifteenth overall in 2022, it fell seven spots in 2023 as all four ranking factors—economic performance, business efficiency, government efficiency, and infrastructure—deteriorated.

Judging the situation’s gravity

As per Habeck, Germany’s reliance on exports has made it particularly vulnerable to changes in global trade patterns. Another broader structural problem for the German economy is its lack of workers. On top of these, add the soaring energy costs and the resultant inflation, which are squeezing German households further.

“In its monthly report, the Bundesbank said ‘stress factors’ would probably remain and that economic output could therefore decline again slightly in the first quarter of 2024. Two negative quarters in a row would put Germany into a so-called technical recession,” BBC reported.

What is stopping the analysts from calling it a full-blown recession for the country is the fact that the German economy is predicted to grow slightly in 2024. And there are some indications towards that in the form of falling inflation, low unemployment and reduced energy costs.

Despite gloomy predictions, Germany successfully pivoted away from Russian gas without blackouts, and wages are rising in many sectors to boost consumer demand, yet businesses remain pessimistic, according to the BBC.

They blame political in-fighting behind the country’s economic woes. Habeck’s ministry has drafted legislation which should cut bureaucracy and give German businesses billions of euros of tax breaks.

The law, despite clearing the huddles in the German parliament’s lower house, got blocked by opposition conservatives in the upper house. And yes, squabbling within Chancellor Olaf Scholz’s three-way governing coalition is not a secret anymore.

Even if economists’ optimism around Germany avoiding recession comes true, the harsh reality is that the European giant is facing growth stagnation, something which can only be cured through policy course corrections. How it can be done? Let’s find out.

Diversify, diversify and diversify

Germany needs to stop depending too much on China to be its main trading partner. Since 2015, China has been Germany’s most significant trading partner, and in 2022, trade between the two reached a record high.

Berlin has long acknowledged that its reliance on China is too great, but changing manufacturing practices is a slow process that will eventually have negative effects on the country’s economic performance.

Consider Volkswagen, which, despite selling only about 3 million cars annually and a peak of over 4 million in 2018, remains a significant player in China, where local companies like BYD have benefited from the rapid shift to electric vehicles.

Foreign automobiles’ market share in China decreased from 64% in 2020 to 44% in 2023. For German corporations such as Volkswagen, the task lies in converting this into a chance for increased diversification.

“It will be challenging to diversify while keeping up current trade and investments in China, though, as we should anticipate that the Asian nation will charge more for international businesses to access its domestic market. But in an uncertain geopolitical environment like this, diversification needs to be the top strategic goal,” The Conversation reported.

According to a recent analysis, by Kiel Institute for the World Economy located in Germany, the country’s economy would contract by 5% in the event of an abrupt stop to trade with China, matching the COVID-19 pandemic or the global financial crisis in terms of severity.

Borrow to invest

Germany inserted a “debt brake” into its constitution in 2009. It was believed that the rule, which drastically limits Germany’s capacity to borrow and run deficits, would encourage prudent spending and guarantee the stability of the public finances.

As Greece and other nations struggled with their debts in the years following the global financial crisis, Angela Merkel and the so-called Troika of the European Commission, European Central Bank, and IMF adopted this as their catchphrase.

But now, things have drastically changed in the area. Due to the “debt brake” clause, Germany’s constitutional court recently halted the transfer of €60 billion (£51 billion) from a pandemic budget to a climate fund. This has resulted in an unresolved budget crisis.

More broadly, because Germany and the European Union compete with other nations that support their businesses, the debt brake has grown to be a significant challenge. Brussels, for example, has opened an enquiry into the possibility of significant market distortions brought about by Chinese state subsidies in the automobile industry.

To help companies transform and remain competitive globally, Germany’s only viable option is to make significant investments in R&D, infrastructure, and more efficient state operations. Increased reliance on debt is necessary to finance this.

Embrace European innovation

According to recent statistics from the Bundesbank, foreign direct investment in Germany fell to €30.5 billion in the first half of 2023 from €34.01 billion in the corresponding period of 2022. This is the lowest inflow number in nearly 20 years and a sharp decline.

It urges serious consideration of Germany’s declining competitiveness and its capacity to draw in foreign capital. Investing in innovation via European Union-led R&D is the only way to reverse this downward trend. Innovation has long been the driving force behind the economic success of Germany and the European Union.

At just over 3% of GDP annually, Germany is among the countries in the bloc that spends the most on research and development. However, considering that the United States and Japan currently invest close to 3.5% of GDP, this is about the same as they were ten years ago. Germany (and the EU) must step up R&D and stay up to date with the latest technological developments.

In a globalised world where nations ranging from China to the US are progressively providing corporate subsidies and implementing policies to safeguard their domestic economies, Germany needs to allocate long-term resources towards government efficiency, infrastructure development, and the promotion of corporate ecosystems. Increased foreign investment will result from this, which is essential for Germany and its EU counterparts to innovate and maintain their competitiveness in the global market.

Meanwhile, according to a Reuters’ story citing the Bundesbank, the German economy was probably in recession in the first quarter of 2024 as weak industrial demand and consumer spending continued to delay the recovery.

According to a Bloomberg survey conducted from March 8–14, the nation’s GDP will shrink by 0.1% in the first quarter.

For the first three months of the year, analysts were forecasting stagnation. Since the start of the Russia-Ukraine war, the largest economy in Europe has struggled due to rising energy and borrowing costs, but recent indicators, including PMI data and sentiment figures from the ZEW Economic Research Institute, suggest that at least a bottom has been reached.

Policy reform for industrial workers

Germany, which has long prided itself on its “nondisruptive working culture,” has been hamstrung by a wave of strikes in 2024. The first three months of the year have had the most strikes in the European country in 25 years.

Be it railways, airports, hospitals or banks, worker agitations have taken a full toll on the German economy, so much so, that Jens Spahn, deputy leader of the conservative Christian Democrats in the Parliament, denounced a “strike madness” that he said risked paralysing Germany.

As the country faces stalled growth, the burden has fallen most heavily on its low- and middle-income workers. Since 2022, their real wages have shrunk more than at any time since the Second World War. To aggravate the problems further, the European giant is facing an ageing population, with officials estimating there will be a shortage of seven million workers by 2035.

Apart from demanding inflation-adjusted pay raises, the workers have also been vociferous about better working conditions, the ability to plan work shifts and vacations long in advance, a better work-life balance and fewer hours.

As per the analysts, Germany’s tax system taxes income far more heavily than it does private wealth, disproportionately affecting low- and middle-income workers. And it needs to be changed.

Clemens Feust, president of the Ifo Institute for Economic Research, told the New York Times that working full-time can be more costly than staying at home. Because of the way taxes are structured for married couples, a family with one partner working full-time and the other working part-time had more income at the end of the month than two full-time working parents.

The strikes are piling up a massive economic risk as critical infrastructures grind to a halt. The one-day strike at airports in March 2024 grounded some 570 flights and affected 90,000 travellers. The Kiel Institute for the World Economy has estimated that the train conductors’ strikes cost the German economy about 100 million euros per day.

However, the disruption also brings an opportunity for the German government to ensure a serious policy reform, which will give the industrial workers both financial and occupational security. After all, one can only ensure a “nondisruptive working culture,” if the participating labour force is happy about their jobs and are eager to invest themselves more in their country’s economic progress.

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According to figures released by the Office for National Statistics (ONS), the GDP increased by 0.6% in the first three months of 2024. The rise comes after the decline of 0.1% and 0.3% in the third and fourth quarters of the previous year. Two-quarters of an economic downturn in a row is the standard definition of a recession.

“Widespread growth” in the leading service sector, whose output increased by 0.7% in the quarter after declining toward the 2023 end, was the primary driver of the expansion in early 2024.

The Bank of England now anticipates that the United Kingdom’s GDP will increase by 0.5% this year, double the rate it predicted in February. In contrast, the GDP only increased by 0.1% in 2023. S&P Global’s survey of purchasing managers indicates that in April 2024, the combined output of manufacturing and services saw its biggest increase in nearly a year. Service companies were once again the growth’s main driver.

But the British economy is doing worse than those of its counterparts. The International Monetary Fund revised its prediction of 0.6% to 0.5% economic growth for Britain this year. Germany is the only developed economy with a slower anticipated growth rate than this one, out of the Group of Seven (G7).

Roger Barker, head of strategy at the Institute of Directors, a corporate lobby organisation, said, “Any recovery is still at an early stage and it is likely to be weak, but there are welcome hints of green shoots.”

Election approaching

Nevertheless, Rishi Sunak and his ruling Conservative Party will feel some respite from their severe defeats in last week’s municipal elections, which boded poorly for the party’s prospects in the general election. He faced additional humiliation as one of his legislators joined the opposition Labour Party.
The growth statistics, according to a statement from UK Finance Minister Jeremy Hunt, are “evidence that the economy is returning to full health for the first time since the pandemic.”

However, his Labour Party opponent, Rachel Reeves, stated that British households were still having difficulty despite the GDP growth. In the general election, polls indicate that the Labour Party will easily defeat the Conservatives. According to a YouGov study, 48% of participants said they planned to vote for Labour in the election, compared to 18% for the Conservatives.

Demons called inflation and unemployment

A return to economic expansion could potentially cause mortgage rates to remain high for longer, delaying the widely anticipated interest rate reductions.
Nomura analysts stated that “higher GDP growth enhances the risk of stronger demand pressures on inflation” and the GDP data “casts doubt” on an immediate rate cut. The European country’s annual inflation rate was 3.2% in April 2024, which is a significant decrease from almost 10% approximately a year earlier.

Governor Andrew Bailey stated that the central bank aims for a rate of 2% and anticipates approaching it in the next few months.

“We need more proof that inflation will stay low before we can decrease interest rates,” he said, while keeping the official borrowing costs at 5.25%.

Bailey further said that while a June interest rate cut was not out of the question, it was also not guaranteed and would depend on data on inflation and the job market.

Between January and March 2024, the unemployment rate rose to 4.3%, and the long-term decrease in job opportunities persisted, with 898,000 positions available during the reporting period, down 26,000 from the previous three-month period and, more significantly, down 188,000 from a year earlier. Although the number is still 102,000 higher than it was before the COVID-19 pandemic, that brief period when there was more employment available than unemployed people has long since passed. The most recent total of claims, however, was close to 1.6 million.

Generally speaking, employers want to wait to fire employees until necessary because redundancy programmes are costly, disruptive, and demoralising to the remaining workforce. If you make a mistake, having to locate new acquaintances is equally expensive and inconvenient. This is a case of some postponed effects from the recession that occurred in 2023.

Is the worst yet to come?

The next financial catastrophe is already visible to the Bank of England. It cannot put an end to it on its own. Bank executives worry that uncertainty in a crucial industry that has become more significant and risky in recent years could lead to another financial market collapse, a la, Liz Truss.

Concerns centre on the “nonbank financial intermediation” sector, a broad phrase that encompasses all significant non-bank investors, including hedge funds, pension funds, insurers, and private equity.

Global standard-setters have been struggling to govern this little-understood sector, but many officials feel that Britain needs to act more urgently given that four risky “nonbank” occurrences in as many years have nearly brought down the British economy.

There have previously been warnings from watchdogs in the European Union, the United States, and other countries about the market chaos that could result from a significant collapse in this industry. But because half of the finance for British businesses now comes from nonbanks and financial markets, Threadneedle Street faces an especially urgent issue.

As a result, any crisis or unrest might not only cause issues for the City of London but also directly impact the employment of thousands of individuals.

The Bank of England is unwilling to wait for the next mishap to occur. But since it can’t solve the problem on its own, it is advocating globally for a solution.
Speaking freely under anonymity, an EU source stated, “The UK has been clearly pushing it because of the size of the NBFI [nonbank financial intermediation].”
Before the next round of volatility causes significant economic harm, the Bank hopes that its battle scars will generate impetus for a global crackdown. It has set out on its path to resolve the problems, but in the absence of global unity, it might just amount to a never-ending game of whacking away at the next new issue that arises.

All eyes on BoE

The British central bank has been struggling lately. Reportedly, it had to reduce issues at UK pension funds back to manageable levels after the mini-budget of former Prime Minister Truss unsettled government bond markets.

Threats to the stability of the British financial system included the rush for cash at the beginning of the COVID-19 pandemic, the collapse of the Archegos hedge fund, and the turbulence in the nickel markets following Russia’s annexation of Ukraine.

These days, nonbanks make up half of the financial system, both in the UK and worldwide. In the United Kingdom, financial markets and nonbanks provide half of the capital for enterprises; in the European Union, this percentage is only 27%.

The concern is that this non-banking portion of the financial system has taken on all of the risks since the global financial crisis of 2008. In contrast, banks have been subject to mass regulations over the past 15 years, forcing them to strengthen their resilience after the global financial crisis rocked the underpinnings of the system.

Nonbanks gorged on cheap debt to boost investor returns during the post-crisis decade of low interest rates when copious amounts of money poured around the system. Central bankers worry they are more exposed now that the economic landscape is shifting due to higher rates and tighter money.

The BoE’s lack of knowledge regarding who has overindulged in debt and where is a serious source of concern. Sarah Breeden, deputy governor of the Bank of England, stated at a central bank seminar in February 2024 that “gaps in our knowledge have meant we are mostly creating resilience in market-based finance in response to crises, while we should be aiming to build resilience ahead of vulnerabilities crystallising.”

It is working alone to learn more. Senior BoE officials have issued warnings about the dangers hidden in private equity and private credit, which occur when investors lend money or purchase companies outside of public markets.

It will release more information on the possible threat that private equity poses to stability in June 2024, including an analysis of how prominent the investment giants’ companies are in specific areas of the British economy and whether or not they pose a greater risk than other types of businesses.
The executive director of the Bank of England, Nathanael Benjamin, issued a warning in April 2024 over “the development in sorts and amount of leverage, or ‘leverage on leverage’, throughout the ecosystem.”

Additionally, the bank is conducting the first-ever stress test of its sort to find out how nonbanks would respond to extremely high levels of possible market stress. In 2024, the results may lead to stricter regulations.

However, the UK central bank might be doing nothing since nonbank dangers are intrinsically worldwide. In reality, quick action is required from organisations like the Financial Stability Board (FSB), a worldwide watchdog, or its equivalents.

The core of the global reform agenda is becoming more and more focused on the topic of debt and where it might blow up markets. It might entail a crackdown on how some financial firms leverage borrowing to inflate returns to avert another global financial catastrophe.

Conor MacManus, director of financial services risk and regulation at PwC, stated, “You’d anticipate these to be areas of regulatory scrutiny, given over leverage and illiquidity are often at the heart of most collapses.”

The Financial Stability Board (FSB) will conduct a leverage consultation with a panel co-chaired by UK markets regulator Sarah Pritchard. The goal of the consultation is to address the underlying cause of the problem, rather than addressing it only when a catastrophe occurs.

However, that won’t happen until December 2024 and isn’t going to become official policy for a while, so it lacks the urgency the Bank needs.

There are some supporters of the BoE’s call for action. The European Union will propose certain measures for a broader framework in May 2024. Separately, meanwhile, there is growing disagreement over how far market regulators and central bankers should go.

This division has in the past limited the scope of changes; it was evident once more in the UK when chief markets regulator Nikhil Rathi played down the BoE’s worries about private equity.

The last thing the central bank wants is competition on its soil since development overseas is happening at a glacial pace.

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She stated that artificial intelligence is expected to affect 60% of jobs in advanced economies and 40% of jobs worldwide within the next two years during an event in Zurich.

In an event organised by the Swiss Institute of International Studies, associated with the University of Zurich, Kristalina Georgieva said, “We have very little time to get people ready for it, businesses ready for it. It could bring a tremendous increase in productivity if we manage it well, but it can also lead to more misinformation and, of course, more inequality in our society.”

Kristalina Georgieva mentioned that the world economy has become more susceptible to shocks in recent years, citing the global pandemic in 2020 and the war in Ukraine.

She also anticipated more shocks, especially due to the climate crisis, but noted that the economy has remained remarkably resilient.

“We are not in a global recession,” stated Kristalina Georgieva, who faced heckling from protesters demanding action on climate change and addressing developing world debt.

“Last year there were fears that most economies would slip into recession, that didn’t happen. Inflation that has hit us with a very strong force is on the decline, almost everywhere,” she added.

Swiss National Bank Chairman Thomas Jordan, who also spoke at the event, stated that the battle against inflation in Switzerland has made significant progress.

In April, inflation increased to 1.4 per cent, marking the 11th consecutive month of price rises within the SNB’s target range of 0-2 per cent.

“The outlook for inflation is much better. It looks that for the next few years, inflation could be really in the same range of price stability. But there is a lot of uncertainty,” Thomas Jordan said.

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On the other hand, there is Europe, whose economy avoided a recession by the narrowest of margins. GDPs across the 20 countries using the currency Euro stagnated in the October-December 2023 quarter compared with the previous three months. Over the whole of 2023, GDP rose 0.5% both in the Eurozone and in the European Union.

Europe’s economy has been hit hard in the post-COVID period, affected by high inflation and rapid interest rate hikes. The Ukraine War 2022 also took the countries here to the verge of an ‘Energy Poverty’, as natural gas prices soared high in the continent, amid falling supplies.

Talking about the French economy, Europe’s second-largest, it grew 0.7% throughout 2023. German inflation fell in January to 3.1% in a buoying sign for the continent’s largest economy, whereas the United Kingdom saw an inflation of 4% in December. It is to be pointed out that the country faced the worst of the inflation and the cost-of-living crisis, throughout 2022 and for a good part of 2023, with food and energy bills remaining on the upward trajectory. The inflation hit a record-breaking 11.1% in October 2022.

Experts Not Happy

According to Christoph Weil, a senior economist at Commerzbank, “This (the current data on the European economy) does not really change the picture. The massive tightening of monetary policy brought economic growth to a standstill in the summer. It is unlikely that the economy will emerge from this weak phase before the spring.”

Weil also pointed out the “persistently high inflation” making it unlikely for the European Central Bank (ECB) to lower its key interest rates, apart from noting that the positive economic impact of the rate cuts (if happen) will only be felt from 2025 onwards. If the ECB doesn’t reconsider revising its interest rate, it will result in higher costs dampening the borrowing activities of households and businesses.

As per Jack Allen-Reynolds, a Eurozone economist at Capital Economics, “The region dodged a technical recession. This is just semantics though. The big picture is that Eurozone GDP has been flat since Q3 2022 when gas prices surged and the ECB started raising interest rates.”

Allen-Reynolds also expects the Eurozone economy to “flatline” in the first half of 2024 “as the effects of past monetary tightening continue to feed through and fiscal policy becomes more restrictive.”

The fact of the matter is United States has already outpaced Europe in terms of GDP and the trend will continue in 2024 too.

Government Spending Making The Difference

As the COVID pandemic disrupted the economy from 2020 to 2022, the United States mitigated it through a USD 2.2 trillion economic stimulus bill, named the Coronavirus Aid, Relief, and Economic Security Act (CARES).

The CARES Act, which stood as the largest financial rescue package in US’ history, provided benefits like unemployment assistance, business relief packages, tax breaks and credits, mortgage, student loan and rent relief, hospital and health care assistance, help for the state governments and last but not the least, earmarked spending for the sectors.

Economists credit these expenditures for the swift recovery of the US economy, with the pandemic-related recession lasting only three months.

“What the money did was to basically make sure that when we could reopen, people had money to spend, their credit rating wasn’t ruined, they weren’t evicted and kids weren’t going hungry,” said Louise Sheiner, an economist with the Brookings Institution, while interacting with the New York Times.

Meanwhile, Joe Biden became the United States President in 2020. His administration had to deal with the COVID and the economic fallouts caused by the Ukraine war. Domestic inflation soared to more than 9% in 2022. There were talks among economists on whether American households and businesses would be cutting back on their spending.

However, the American economy grew faster than expected in 2023. Things have been more than manageable for American households, in comparison to their European counterparts.

The Biden government spent massive money in the form of unemployment allowances, universal stimulus checks, and expanded child tax credits. All these moves resulted in the Americans accumulating enough savings to fight inflation. Also, average pay increases peaked at 6.4% and rose as high as 7.5% among the lowest-wage workers, which helped things further.

Uncle Sam went big and bold with his forceful fiscal spending, which helped to sustain consumer spending, which accounts for 70% of US’ economic activity.

In comparison, the United Kingdom provided 330 billion pounds in emergency support for businesses, apart from introducing a furlough scheme for employees, as COVID kicked in. There were plans like stamp duty holiday, cut to value-added tax (VAT) for the hospitality sector, job retention bonus for employers and the ‘Eat Out to Help Out scheme’, to boost the hospitality industry. The ‘Winter Economy Plan’ helped the British economy to sail through the pandemic disruptions throughout 2021.

As the cost of living crisis started in 2022, the UK came up with a 5 billion pound windfall tax on energy companies to help fund a 15 billion pound support package for the public. However, everything was undone by a 50-day disastrous rule of Liz Truss.

US’ Resilient Jobs Market

The unemployment rate in the US has been below 4% since February 2022. Despite inflation reaching close to 10% in 2022, real wages rose as well, with low-income households especially benefiting from the trend.

As per the Bureau of Labour Statistics, the unemployment rate remained flat for the third month in a row at 3.7% for January 2024. Job gains for the month were double the expected amount with the total coming in at 353,000.

For the week ending February 3, weekly jobless insurance claims decreased too, after remaining steady throughout 2023.

Now talking about the similar ratios in Europe, the Eurozone’s unemployment rate fell to 6.4% in November 2023, a record low since the ‘2008 Great Recession’.

However, the ratio is higher than that of the US. As per the International Labour Organisation, the global unemployment rate will rise to 5.2% in 2024, whereas in the United States, the same ratio has been below 4% since 2022.

Despite interest rate hikes (which cooled demand, borrowing and investment), the world’s largest economy, by October 2023, had been generating new jobs for 33 consecutive months. Some 14.4 million jobs were created at a record pace. The unemployment rate remained below 4% for 20 consecutive months, the best streak in half-a-century.

There were a record 161.6 million employed people in the country and the number has been at the higher territory since then.

If one makes the assumption of Uncle Sam outpacing Europe in the ‘Race of Economy’, he/she won’t be that dead wrong. While Washington has been able to prove the ‘Recession Alarmists’ wrong to some extent, Europe’s tale has been the opposite one, with the continent somehow avoiding ‘Technical Recession’ till now.

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