Debt dispute over, but: the US economy will cease to be a global economic engine for now

The US politicians have once again made things exciting. As they have done so often in the past, they only agreed to raise the debt ceiling again after months of negotiations. As a compromise, spending cuts, such as social services, were agreed upon. Debt has risen sharply in the USA in recent years. Attempts to curb this increase are appropriate. From an economic point of view, however, the latest agreement comes at an unfavorable time. The US economy is already cooling. High inflation, higher interest rates, and problems in the banking sector will probably cause GDP to stagnate or even shrink somewhat in the second half of the year. With the planned spending cuts, a contraction becomes even more likely.

This development means that the US economy will cease to be an economic engine for the world for now. At the same time, other potential economic drivers are also dropping out. The euro area has weathered the energy price crisis much better than feared a year ago. But the economies in the euro area are still weakened. The growth losses from the pandemic and the energy crisis are considerable. The German economy, in particular, has not only been weakening since the energy crisis. For example, GDP is lower today than immediately before the pandemic outbreak, while most advanced economies have at least recovered to pre-pandemic levels. Even though the German economy has weathered the energy crisis better than feared, GDP at the end of 2023 will likely be around four percent lower than expected before Russia invaded Ukraine.

China’s role as a driving force for the global economy will also be limited. After the financial crisis, extensive stimulus packages stimulated not only the domestic economy but also the global economy and, in particular German exports. Following the repeal of the zero-covid policy last December, the Chinese economy is now picking up significantly, but ultimately probably too little vigorously to serve as a drawing card for the global economy.

The constellation of weak growth in the three major economic areas will mean that the global economy will only grow at comparatively low rates this year. People and companies in many places are groaning under increased inflation and higher interest rates. And no strong growth impetus for the world can be expected from China or the euro area in the coming years. We have known for some time that potential growth in these two economic areas is likely to be lower in the future than it has been to date. Factors such as the aging of the population, low productivity growth, or high debt are dampening. Geopolitical tensions are now adding further costs and uncertainties.

             Despite all the problems, the US economy will most likely play the growth engine role in the medium term. A look back shows that it often digests crises more quickly than European economies. The US economy overcame the financial crisis and the economic consequences of the pandemic more rapidly than many European economies. American companies spend more on research and development on average than European companies, for example. And above all, they are particularly successful at translating technological progress into successful products on the market. The most recent example in connection with artificial intelligence is ChatGPT, for instance. In addition, the USA has provided considerable financial resources for investments in the energy transition or infrastructure under President Biden for the coming years. So despite political polarization and high inequality, the chances are good that the U.S. economy will thrive in the medium term and serve as an engine for the global economy. A strong US economy would help the European economies to get back on their feet more quickly after the double crisis of pandemic and high energy prices.

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