Geoeconomics Bi-Weekly: European Central Bank Primed to Cut Interest Rates Next Week

State of the Global Economy 

As we head into next week, markets are closely monitoring Europe. Officials from the European Central Bank (ECB) have suggested it will begin cutting interest rates as soon as next week, marking a new chapter in the global fight against post-pandemic inflation. Still, while Eurozone inflation has trended towards the ECB’s 2% target over the last several months, the outlook for the rest of the year is murky. Earlier today, the consumer price index (CPI) registered an annual price increase of 2.6% in May, an increase from 2.4% in April, while Core CPI rose from 2.7% to 2.9%. Eurozone unemployment also fell to a record low of 6.4% in April. Signs of a strengthening job market indicate that wages might remain higher than anticipated, pushing up prices for labor-intensive services. Despite the acceleration in inflation, markets widely expect the ECB to cut interest rates in its upcoming meeting on Thursday, June 6th. 

Across the Atlantic in the United States, U.S. GDP growth in the first quarter of this year was revised down to 1.3% from the initial estimate of 1.6%, while consumer spending was revised down from 2.5% to 2%. Nevertheless, the U.S. economy and consumer spending remain resilient despite the revisions, buoyed by rising incomes and a strong job market. The core concern remains stubborn inflation. Earlier this morning, the Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) index, held steady at 2.7% between April and May, while Core PCE remained steady at 2.8%. The Fed meets next on June 11th to decide on interest rate cuts. 

And across the Pacific in China, the Chinese government finally unveiled its plans to tackle the nation’s property sector crisis. China’s central bank, the People’s Bank of China, will leverage a $41 billion fund to purchase unsold housing, which it will then repurpose as affordable housing. Still, while certainly a lot of money, some analysts view it as a “drop in the ocean” given the scale of the crisis. Nevertheless, China did receive some positive news this week. The IMF increased its forecasts for China’s economic growth by 0.4%, estimating that China will grow 5% this year and 4.5% in 2025. This is in line with China’s target of 5% growth in 2024. Unemployment in China also dropped in April, falling from 5.2% to 5%. Youth unemployment, a major point of concern in China, fell from 15.3% in March to 14.7% in April.  

Around the World 

Attacks on merchant vessels in the Red Sea continue to elevate global shipping costs: More than six months after the Yemen-based Houthis first began assaulting merchant shipping in the Red Sea, attacks persist and global shipping costs remain elevated. The average cost of shipping a standard 40-foot container between east Asia and northern Europe eclipsed $4,300 last week, roughly three times higher than the same period last year. Further, as merchant vessels elect to avoid the Red Sea and instead sale south around Africa, ports unaccustomed to large trading volumes are increasingly under strain, adding to backlogs. The Red Sea disruptions come as global shipping faces multiple challenges, such as resurgent pirate attacks off the Somali coast and a drought in Central America which slowed shipping through the Panama Canal earlier this year. Shipping companies are preparing for disruptions in the Red Sea to continue into 2025.  

United States hosts Kenyan President in official state visit as Russian and Chinese influence in Africa grows: While President Biden claimed the United States was “all in” on Africa in 2022, U.S. influence on the continent has waned over the last several years amid increasing disillusionment with the American-led global system. China and Russia have quickly filled the gap, with Russian security forces making inroads in many countries while Chinese businesses and capital spread throughout the continent. Recognizing both the risk of abandoning Africa and the tremendous opportunity it presents, the United States has looked to Kenya as a bulwark in the region. This relationship was reinforced this week as President William Ruto of Kenya traveled to Washington for the first official state visit to the U.S. by an African head of state since 2008. Much of the visit focused on increasing economic ties between the two nations, with the two leaders discussing Kenya’s burgeoning tech sector, debt relief, and renewing the African Growth and Opportunity Act, a trade pact that provides duty-free access to the U.S. market for 1,880 product lines from eligible African countries set to expire next year. 

China, Japan, and South Korea hold first trilateral summit since 2019 to reset economic relations: After years of souring relations, the three largest economies in east Asia met earlier this week for the first time in almost five years to restore economic cooperation and reinforce regional stability. While South Korea and Japan’s increasing military and geoeconomic cooperation with the United States makes China uneasy, the three neighbors recognize the benefits of cooperation amid a post-pandemic economic slowdown. China is the largest trading partner of both South Korea and Japan, while Japan and South Korea are China’s 2nd and 3rd largest trading partners, respectively. Though clear differences between the three nations persist, particularly on security issues relating to North Korea and Taiwan, they agreed to cooperate on shared economic issues such as supply chain security, while pledging to restart talks on a free-trade deal. 

U.S. and EU officials agree to tap frozen Russian money to fund Ukraine’s defense: At a meeting of G7 finance ministers in Italy this week, the United States and its allies agreed to utilize the returns of the nearly $300 billion in Russian assets frozen in Western financial institutions to support Ukraine. Under the plan, the Western allies would give money to Ukraine in the near term, then utilize the returns accruing on these assets to pay themselves back. While the exact amount that could be raised this way could vary depending on market conditions such as interest rates, Western leaders believe it could yield as much as $50 billion in funding for Ukraine. Still, some argue that seizing Russia’s frozen assets may backfire by setting a troubling precedent for U.S. adversaries, destabilizing financial systems, and undermining the credibility of Western financial institutions and assets. President Biden and other heads of state could ratify the plan during the 50th G7 summit in June. 

End of Japan’s decades-long fight against deflation is “in sight”: While much of the world has been fighting against inflation over the last several years, Japan has welcomed it. For decades, the east Asian nation has experienced low inflation (and at times deflation), which some economists think contributes to Japan’s sluggish economic growth. But this deflationary period may be ending. Data from Japan’s Bureau of Statistics showed an annual price increase of 2.5% in April, marking two straight years of inflation holding above the Bank of Japan’s (BoJ) 2% target. Still, some BoJ policy board members stress that victory isn’t assured and questions of when to increase interest rates remain hotly debated. Given Japan’s slow economic growth (it narrowly avoided a recession at the end of 2023), some analysts believe the recent inflation has been driven by a weakening Yen rather than a hot economy and that the BoJ should avoid increasing interest rates. The BoJ meets next on June 13, after raising interest rates in March for the first time since 2007. 

What we’re watching 

  • June 6 – The European Central Bank meets to decide on interest rates. 
  • June 6-9 – The European Union holds elections for European Parliament. 
  • June 11 – The U.S. Federal Reserve meets to decide on interest rates. 
  • June 13 – Leaders of the G7 meet in Fasano, Italy for the 50th G7 Summit. 
  • July 4 – The United Kingdom holds a snap election, which will lead to the formation of a new government. 
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Chris Borges
Program Manager and Associate Fellow, Geoeconomics Center
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Kirti Gupta
Senior Adviser (Non-resident), Renewing American Innovation Project