The global economy has likely been spared a US debt default. It still faces a mountain of risks

The global economy has avoided a huge shock with the US debt crisis receding, but there are still many storm clouds darkening the outlook.

The global economy has likely been spared a US debt default. It still faces a mountain of risks

London CNN

The global economy appears to have escaped a major shock as the threat of a US debt crisis is rapidly fading. There are still many storm clouds that threaten to cloud the future.

US House of Representatives lawmakers passed a bipartisan measure Wednesday that would raise the debt ceiling to allow the government continue paying its bills. The Senate must still approve the bill, but it is unlikely that a global financial meltdown will result from a default.

The immediate crisis may have been avoided but the problems, such as high inflation, rising rates of interest and slow growth, that were temporarily obscured by the threat of a US default, are still there.

Carsten Brzeski is the global head of macro-research at Dutch bank ING.

The United States and China, the two largest economies in the world, are already showing signs of slowing economic growth.

Data released on Wednesday revealed that the US economy grew below expectations during the first quarter. Factory activity in China also slumped to its lowest level since China ended its zero-Covid policies five months earlier.

The latest signs are that China's economy is losing momentum. Its recovery has been slowed by a weak domestic demand, increasing unemployment and a deep slump in the property sector.

China, Germany's most important trading partner, is unlikely to help it out of its own slump. Germany's economy slipped into recession during the first quarter of this year as the energy price shock last year had a negative impact on consumer spending.

A prolonged slowdown in Europe’s largest economy could spell trouble for the remainder of the region. The rest of the area narrowly avoided recession at the beginning of the year.

The momentum is already slowing in France. This country has experienced a strong recovery from the pandemic. Official data released Wednesday showed that consumer spending in April fell for the third month running.

Charlotte de Montpellier is a senior economist with ING. She said, "We can say now that the second quarter started off in a bad way." It is evident that the French economy has slowed sharply.

Inflation still too high

In this context, the inflation rate in Europe's second largest economy has lowered, mirroring falls in Germany and Spain. The data for May, due Thursday, is expected to show that consumer prices in the 20 euro-using countries rose at a lower rate than they did in April when inflation reached 7%.

The rate of inflation has also moderated, in both the United Kingdom (at 8.7%) and the United States (4.9%), but remains high. Central banks are targeting a rate below 2%.

Investors anticipate that policymakers will increase interest rates in the next few weeks to combat rising prices, which are a drag on economic growth.

Inflation raises the price of goods and services that consumers use every day, reducing their consumption. Interest rate increases make mortgages and loans more expensive. This has a negative impact on household and business spending.

It is still too early to see the full impact of increased borrowing costs. In a report released Wednesday, Deutsche Bank stated that a wave defaults was imminent among US and European firms due to the tightest monetary policies in 15 years combined with higher debt levels and decreased profitability.

Analysts at Deutsche Bank said that the peak of this wave will not be until 2024.

Capital Economics' analysis suggests that the effects of the monetary tightening in developed markets are not being felt by the real economy.

In a May 15 note, Group Chief Economist Neil Shearing stated that 'as tighter financial circumstances bite, we expect the majority of major advanced economies will slip into recession, and wage and pricing pressures will cool'.

He added that 'the recessions we forecast are relatively mild, and could probably be classified as soft landings due to the extreme rise in inflation during the last year'.

Extreme weather and war

Unexpected shocks can make any recession worse, no matter how mild.

It now seems unlikely that this will come from the US government. It could come from two threats that have been around for a long time: the Ukraine War and the Climate Crisis, which both pose risks to food prices and global supply chains.

Vladimir Putin, the Russian president, has threatened to retaliate for the rare drone attack on Moscow that occurred Tuesday. Two people were reportedly injured in this attack and several buildings were damaged.

Ukraine has denied any involvement in the attack on Moscow. The country is preparing a counteroffensive, long awaited, against Russian troops invading its territory.

Michael Bociurkiw is a senior fellow with the Atlantic Council. He said that it is likely, in the near future, that Russia will employ a hybrid approach to attack Ukraine, and make things uncomfortable for the west.

Bociurkiw said that this could include the 'weaponization of food' by restricting ships transporting grain and agricultural products from Ukraine into western markets.

Last year, the war was a major factor in driving international food prices up to an all-time record. Despite the fact that prices have dropped, they are still high in many countries. This has led to extreme hunger among poor nations.

In Europe, food inflation is already at record levels. Last month, devastating floods in northern Italy swamped thousands farms in a region of the country called 'fruit Valley'. The "once in a lifetime" disaster was the result of years of drought, which had compacted soil and reduced its ability to absorb rain.

A second severe drought could worsen the situation in southern Europe. In a recent report, Gro Intelligence (a provider of agricultural information) stated that Spain's parched land and intense drought is affecting a wide range of crops, and could drive food prices up in many EU nations.

According to a report, Spain is the third largest tomato exporter in the world. Also produced in the country are wheat, barley and rice.