In the face of ongoing wars and a grim geopolitical backdrop, the global economy has remained a beacon of hope. Just a year ago, concerns loomed over an impending recession due to high interest rates. However, the optimists have been surprised as the world economy defied expectations.
America’s economy, in particular, displayed remarkable resilience, surging at an impressive annualized rate of 4.9% in the third quarter. Globally, inflation rates are decreasing, unemployment remains relatively low, and major central banks have paused their monetary tightening. Even China, amidst a property crisis, is anticipated to benefit from a modest stimulus.
Despite the current optimism, this economic cheer may be short-lived. The foundation supporting today’s growth appears precarious, and lurking threats cast a shadow on the future.
The buoyant economy has led to speculation that while interest rates are no longer rising rapidly, they may not decrease significantly either. Recent actions by the European Central Bank and the Federal Reserve, maintaining steady rates, have triggered a sharp rise in long-term bond yields. The United States, for instance, now faces a 5% borrowing rate for a 30-year period, a substantial increase from the 1.2% during the depths of the pandemic recession.
Even nations accustomed to low rates, such as Germany, have witnessed significant hikes in their borrowing costs. Notably, Germany’s ten-year bond yield, which was once negative, has climbed to nearly 3%. The Bank of Japan, too, has nearly abandoned its commitment to peg ten-year borrowing costs at 1%.
In this fragile economic landscape, the mirage of global prosperity appears increasingly susceptible to disruption, raising concerns about the sustainability of the current economic boom.