Economic Review, October

Despite geopolitical tensions and rising energy prices, the global economy continues to show remarkable resilience. In the United States, growth accelerated in the third quarter, supported by consumer spending and sustained high levels of investment, particularly in infrastructure linked to artificial intelligence. Europe is holding up, although its growth potential remains significantly lower than that of the United States. China is the main weak spot: the manufacturing PMI is falling, signalling a further contraction in industrial activity. The global economy is therefore not sliding into recession, but regional divergences are widening.

This resilience is accompanied by a resurgence of inflationary concerns, with inflation exceeding 3.7 per cent in the United States and the eurozone. The sharp rise in energy prices, driven by geopolitical tensions and supply disruptions, presents a further challenge. The risk now is that this energy shock will feed through to production costs, services and, ultimately, wages. For central banks, the key challenge is to prevent inflation expectations from becoming unanchored.

Faced with this situation, the major central banks are biding their time. Both the Federal Reserve and the European Central Bank kept their key interest rates unchanged in October. Their position is, however, becoming increasingly uncomfortable. Inflation that remains too high argues in favour of maintaining a restrictive policy, whilst further monetary tightening could ultimately weigh on economic activity. The dilemma is particularly acute in Europe, where policymakers must also contend with modest growth and public finances under pressure. The situation in France serves as a reminder that rising borrowing costs can bring fiscal sustainability back to the forefront.

Beyond the central banks’ forthcoming decisions, a more structural question ultimately arises regarding interest rate levels. Geopolitical tensions, the reorganisation of supply chains, increased defence spending, the energy transition and the development of artificial intelligence are all translating into financing needs that are pushing up interest rates. At the same time, public debt is limiting the fiscal manoeuvre room of many governments. The fight against inflation is not over, but its nature is changing. Following the imbalances linked to the pandemic, it is now energy, geopolitics and fiscal constraints that are complicating the normalisation of monetary policy.