The gap between Europe and the United States widens as the former falls into recession and the latter avoids one.
Inflation in the United States keeps falling more than expected, economic data released on Tuesday revealed. The American Consumer Index Price was 4% year-on-year in May, down from 4.9% in April. Last month’s data was also better than predicted, signaling good times ahead for the economy.
Inflation has been a thorn in the US economy’s side for two years. Since the Covid pandemic, consumer prices and living costs have skyrocketed everywhere in the developed world. The illegal Russian invasion of Ukraine further exacerbated inflation, especially in Europe.
The economic downturn has forced central banks on both sides of the Atlantic to raise interest rates. Since early 2022, the American Federal Reserve, the European Central Bank, and the Bank of England have all tightened their monetary reserves.
By raising interest rates, central banks almost caused a banking crisis, both in America and in the United States. But recent data shows that corporate greed causes prices to stay high, compelling the Fed to be tougher in its hikes.
Now that inflation is slowing down faster than expected, the Fed might finally stop interest rate hikes, instead opting for a stabilization policy. If inflation keeps falling, interest rates might even start to come down.
Tomorrow the Fed will hold its monthly meeting to decide future monetary policy. At the moment, markets predict a 97% probability that interest rates will not be raised. After months of terrible uncertainty, the US economy might finally avoid a recession.
A completely different scenario, however, awaits Europe.
"War thorne" Europe
While the US will almost definitely avoid a recession (it all depends on tomorrow’s meeting), the Eurozone has already fallen into one. Germany, Europe’s biggest economy, announced a technical recession in May following two quarters of GDP contraction.
The Eurozone followed suit after revised data showed a 0.1% GDP fall in the first quarter of 2023.
However, the recession does not seem to be bothering Christine Lagarde, the president of the ECB. She announced that inflation is still "too high" despite a massive fall in May to 6.1%.
It’s clear interest rates will keep rising in the Eurozone, further plunging the old continent into an economic downturn.
And with the energy crisis expected to continue until 2026, the old continent might have serious trouble ahead. The war in Ukraine is causing serious economic concerns for the European Union, though support for Kyiv’s cause remains steadfast.
But the war will certainly have long-term economic implications for Europe. It will change the balance of power significantly, taking it away from Germany and giving it to new energy hubs.
Unless, of course, Europe counts again on one single, extremely unreliable energy supplier.
