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A Perilous Macroeconomic Moment

While inflation in major economies has probably peaked, central banks will have to maintain tight monetary conditions. Even if the fallout from the recent turmoil in the US banking sector is contained, business and consumer confidence is likely to remain subdued in much of the world, constraining global growth.

ITHACA – This is a perilous moment for the world economy, as stubbornly high inflation, bank failures, and geopolitical tensions threaten to derail growth. There are a few bright spots, with China and India projected to post around 5% and 6.5% growth, respectively, this year. As the latest update to the Brookings-Financial Times Tracking Indexes for the Global Economic Recovery (TIGER) demonstrates, however, the proliferation of risks and the tightening of financial conditions are taking a toll on business and consumer confidence and investment.

Inflation in major economies seems to have peaked as supply constraints ease, demand weakens, and some transitory factors – such as last year’s spike in energy prices – wane. Still, persistent above-target inflation leaves many central banks with little choice but to continue tightening, even if less aggressively than before. Complicating matters further is the banking-sector turmoil in some advanced economies, including the United States, which has undermined private-sector confidence and could, when paired with tighter financial conditions, hinder growth beyond this year.

The US economy continues to show surprising resilience despite numerous headwinds, with employment and consumption demand still growing robustly. Yet the collapse of Silicon Valley Bank and Signature Bank last month augurs more trouble. Even if authorities can head off systemic risks, already-fragile business and consumer confidence may still take a hit. With inflation expectations easing, a “softish” landing is not out of the question but depends on how quickly the Federal Reserve tries to push inflation toward its target while seeking to limit damage to the financial sector. Moreover, the impending showdown over the federal debt ceiling could disrupt markets worldwide and adversely affect growth.

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