China’s economic slowdown poses a risk of contagion to other countries, according to US Treasury Secretary Janet Yellen. However, she also expressed optimism that a recession in the United States is unlikely this year. Yellen’s comments come in the wake of new data showing that China’s gross domestic product (GDP) grew only 6.3% in the second quarter of the year, due to declining exports, weak consumer spending, and a struggling property market.

The sluggish Chinese economy, hit hard by the COVID-19 pandemic and strict lockdown measures, has raised concerns about the global economic recovery. Yellen highlighted the potential negative spillover effects on countries in Asia, and emphasized that many economies depend on strong Chinese growth to drive their own economic expansion. Despite the slow growth in China, Yellen noted that the US labor market remains robust.

Meanwhile, the US economy is already grappling with issues such as higher interest rates, persistent inflation, and fears of an impending recession. Inflation in June saw a decline to its lowest level in over two years, but still remains higher than the Federal Reserve’s target of 2%. Yellen expressed satisfaction with the recent downward trend in inflation, stating that the US is on track to manage prices without causing significant harm to the labor market.

Despite the challenges posed by higher interest rates, the US labor market has demonstrated resilience in the face of these conditions. However, there are signs that it may be starting to soften, with the weakest job creation performance in June since December 2020. Policy makers have responded to inflationary pressures by raising interest rates sharply over the past year, with 10 consecutive rate hikes. These actions have caused interest rates to surge from near zero to above 5%, the fastest tightening pace seen since the 1980s. Another rate hike is expected to be approved at the conclusion of the upcoming two-day meeting.

Higher interest rates can lead to increased rates on consumer and business loans, which in turn suppresses economic activity as employers reduce spending. This has resulted in the average rate on 30-year mortgages surpassing 7% for the first time in years. Additionally, borrowing costs for home equity lines of credit, auto loans, and credit cards have also spiked.

In conclusion, while China’s economic slowdown poses risks to other countries, such as the United States, Treasury Secretary Janet Yellen remains optimistic that a recession can be avoided. However, the US economy is already facing challenges such as higher interest rates and persistent inflation. Despite these headwinds, Yellen sees positive signs in the recent decline of inflation and the resilience of the labor market. As policy makers grapple with these economic challenges, the impact of higher interest rates on borrowing costs and overall economic activity continues to be a concern.