Global financial chiefs to chart escape routes for the economy

Bloomberg – A summer of economic stress awaits the world’s richest economies.

In the United States, President Joe Biden and Republicans in Congress are locked in a row over raising the debt limit to $31.4 trillion. Meanwhile, the biggest banking pressures in the US since the 2008 financial crisis have begun to curb lending.

In Europe, inflation remains high, German industrial production is declining, and the Russian war in Ukraine continues, with new attacks expected.

Globally, labor shortages and the rising cost of living have led to strikes, from train engineers in the UK to screenwriters in Hollywood. The El Niño weather phenomenon threatens to disrupt food and energy production. Contract manufacturing activity around the world. Tensions between China and the United States remain high.

That is the frightening mix of risks facing finance ministers and central bankers from the Group of Seven nations, who are meeting in the northern Japanese city of Niigata starting Thursday for three days of talks.

On the agenda are strengthening the global financial system, debt relief for the poorest countries, and building more resilient supply chains.

Policymakers will also discuss the ongoing battle to rein in inflation – with the exception of Japan – as the sharpest interest rate tightening in decades begins to take its toll on the real economy and the long and volatile policy lag continues with borrowers and lenders.

While the Fed hinted at a pause, the European Central Bank chief said, Christine Lagarde stoked expectations for continued rate hikes by warning last week that the Bank remains “stuck on our target”.

Even if only some of the summer fears materialize, it’s possible that traders betting that the bullish cycle is over. Conversely, if policy makers can overcome the hurdles and keep their economies pulsating until the fall, this success will only create new problems.

“The risk of a near-term recession is high, and if the US and other economies contract in the coming months, “It is possible to contain pricing power without creating a corner for central banks,” Bruce Kasman, chief economist at JPMorgan Chase & Co. wrote in a recent note.

“However, if central banks successfully navigate expansion through this turmoil, they are likely to reinforce the fundamental shift in the inflationary process now underway and come under pressure to resume the tightening process,” Kasman said.

Optimists note that global activity around the world is better than expected at the beginning of the year, mainly due to the easing of the energy crisis in Europe, China’s sudden reopening and US employment data still defying expectations of a reversal.

Investors are preparing for tough times. Stan Druckenmiller, the billionaire founder of the Duquesne family office, said Tuesday during the Sohn 2023 Investment Conference that he believes the US economy is teetering on the brink of recession and expects a “hard landing.”

April statement

The last time G7 ministers met in Washington in April, they noted that global economic growth had proven more resilient than expected, Inflation remained high, central banks were determined to control prices, and bank concerns highlighted economic uncertainty.

Since then, both the Federal Reserve and the European Central Bank have raised interest rates again, with the Bank of England set to do so on Thursday. Treasury Secretary Janet Yellen warned of “economic and financial catastrophe” if the debt limit impasse is not resolved. First Republic Bank joined the growing list of regional lender victims.

“It remains difficult to get a clear picture of the performance of the global economy,” Harriet Smith and James Pomeroy, economists at HSBC Holdings Plc, wrote in a recent note. Inflation is still very high. The risks abound, particularly those related to the potential spillover effects of tensions in parts of the banking sector, particularly US regional banks.

— in collaboration with Zoe Schneeweiss.