Growth is holding up despite renewed energy pressures. But persistent inflation and rising government bond yields are creating new risks for the global economy.
The economy has been more resilient than many expected. In the US, investment, tax refunds and strong equity markets have helped support growth, while spending on artificial intelligence (AI) has provided an additional boost.
But that strength brings challenges. Inflation remains elevated, with higher energy prices adding to the pressure. Meanwhile, strong demand for investment capital and heavy government borrowing are pushing up the returns investors expect for lending money over longer periods.
France is one example of how concerns over government finances are affecting bond markets, with the gap between French and German government bond yields widening.
The key question is whether higher yields simply reflect a stronger economy, or eventually become a brake on growth. As yields rise, borrowing becomes more expensive for governments, businesses and households. Go too far, and that could begin to weigh on economic activity and financial markets.
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