With the US Federal Reserve continuously upping the interest rate for the past year and more to fight inflation, it was feared that the higher interest rates will have the negative impact on economic growth, and there have been predictions of a recession in the American economy. But recession has not been happening.

The unemployment rate has been at 3.5 per cent in July, and the growth rate has been positive in the last two quarters at 3.2 per cent in Q3, 2.6 per cent in Q4 of 2022, and 2 per cent in Q1 and 2.4 in Q2 of 2023. An Atlanta Fed GDP forecast says that for July-September quarter the growth will be 5 per cent. It is now the turn of the economists and other forecasters to review their predictions about recession. Fed Reserve chairman Jeremy Powell said after last month’s policy meeting, “The staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession.” The resilience of the economy has mainly risen from the consumer spending and private sector continuing to borrow and invest.

Michael Gappen, chief economist of Bank of America who had predicted a mild recession in the American economy last year had to revise his view, and he said, “Incoming data has made us reassess our prior view. We revise our outlook in favour of a ‘soft landing’ where growth falls below trend in 2024, but remains positive throughout.” There is no doubt that inflation really became infectious after the Covid-19 pandemic, and the Fed Reserve felt duty-bound to increase interest rates because Powell felt that inflation was the greater danger than economic slowdown. There has been a slowdown in the American economy but it is not certain whether it is due to the Fed Reserve’s policy of raising interest rates.

A slowdown in the American economy is not good news for the global economy even as a tumbling Chinese economy is bad. The top two economies struggling to revive growth is a strange coincidence, and it has meant that the global economic growth rate would remain modest. There is of course the success story of emergent economies like the UAE, Saudi Arabia and India clocking healthy rates of growth in the midst of global economic doom. But the emergent economies doing well is not sufficient for the upturn of the global economy. It needs both the US and China to fare better. The European Union (EU) is struggling as well. And the ASEAN (Association of South-East Asian Nations) economies have been stuttering as well.

It appears that the economic impact of the Covid-19 pandemic remains to be assessed and quantified. Part of the argument to explain inflation in the US and in Europe has been that the governments went into overdrive to keep the incomes of the citizens above water, and this has led to the consequent inflation.

It is not a fully convincing argument because the incomes that the governments kept giving to the citizens was to keep the economy going when there was an industrial lockdown and industrial production fell. The problem was that the industrial turnaround did not happen as vigorously as it was expected to, and this has led to the slowdown.

The inflation part can be traced to the incomes that people had with them to spend. But it remains an unsatisfactory argument because the real problem of the economy was lack of workforce on the one hand, which slowly turned into an unemployment issue. But most economists and central bankers were looking at the inflation figures and they were focusing on it exclusively. Meanwhile, people worked around the economic problems and kept it chugging.