What a tranquil week it has been for the world economy!
Or so it seems. Except, nothing is as good as it looks.
The U.S. and China extended a , and U.S. President Donald Trump is meeting Vladimir Putin, his Russian counterpart, to discuss , fuelling investor optimism and sending world stocks to .
Even better: data seem to be showing that Trump’s tariffs are not doing the damage economists have long warned about. , predicted to jump as retailers pass on import duties, was benign in July, and GDP growth in the euro zone, which relies heavily on exports to the U.S., held up. The also grew more than predicted.
This is opening the door to a next month, a boon for American homeowners who are paying some of the highest in the developed world.
All good then, and there’s nothing to see here, right? Consumers think so. Ryanair, Europe’s biggest airline, said demand is "very strong" and fares are high as European consumers, sitting on ample savings, to escape a heatwave.
The optimism may be premature, however.
Putin has given absolutely no indication he is willing to compromise. His conditions for a ceasefire - Ukraine’s withdrawal from its own territory claimed by Russia - are a nonstarter. In fact, Friedrich Merz, the German chancellor, made clear that the EU will not compromise on the principle that borders cannot be .
Such a wide gap in starting positions raises the risk of a failure at the Alaska summit or that Europe is presented with a compromise it cannot accept.
The benign U.S. inflation figures may also be too good to be true. Some argue that it just takes longer for goods to get repriced in stores, and the tariff effect is still coming. estimates that consumers absorbed just 22% of tariff costs through June, but their share could rise to 67% and U.S. businesses will absorb less than 10% of the cost. This would suggest that an inflation bump is still ahead, a suggestion Trump decried.
Europe’s resilience may be a mirage, too. Industrial sharply, employment is barely growing, and investor morale in Germany, the bloc’s biggest economy, is .
Trump is also adding a new layer of complication to the story: questions over the reliability of economic data.
He fired the head of the Bureau of Labor Statistics, accusing her without evidence of manipulating employment figures. In her place, E.J. Antoni, a longtime critic of the BLS, raising fears among critics that the bureau may start to tailor figures to meet the president’s political agenda.
The problem is that key agencies, including the Fed, rely on this data for key decisions, suggesting that lower data reliability could lead to increased policy volatility and a greater risk of policy error.
For now, though, Trump is likely to feel vindicated in his fight against Fed Chair Jerome Powell, whom he called and a knucklehead, among many other slurs. The September cut could also embolden Trump to pick a new Fed chair closer to his own political agenda when Powell’s term ends next May, politicising further an institution whose independence is enshrined in law.
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