Geoeconomics Bi-Weekly: International Institutions In Focus as G7 Leaders Meet in Italy

State of the Global Economy 

Earlier this week the World Bank updated its economic forecast, now projecting the global economy to grow at an annual rate of 2.6% this year, up from a January forecast of 2.4%. However, it conceded that this sunnier outlook could darken if interest rates stay high. 

So, it was welcome news last week when the European Central Bank (ECB) cut interest rates for the first time since it began raising them nearly two years ago. After peaking at 10.6% in October 2022, annual Eurozone inflation came in at 2.6% in May, and is on track to reach the central bank’s 2% target next year per ECB President Christine Lagarde. Still, ECB officials caution that additional interest rate cuts will be gradual. Last Friday, the ECB released wage data that raised concerns of sticky price pressures. Pay per employee rose at an annual rate of 5.1% in Q1 2024, up from 4.9% in the previous quarter. 

In contrast to the ECB, on Wednesday the U.S. Federal Reserve held interest rates steady for the 7th straight meeting. Earlier this week the consumer price index (CPI) registered an annual price increase of 3.3% in May, while core CPI came in at 3.4%. Though a slight decrease from April and lower than expected, inflation nonetheless remains well above the Fed's 2% target. Indeed, the Fed now projects one rate cut this year, down from its March projection of three. Nevertheless, the U.S. economy remains strong, granting the Fed plenty of leeway to maintain elevated interest rates. Though unemployment reached 4% for the first time in over two years in May, both annual wage growth (4.1%) and monthly payroll growth (272,000) exceeded expectations. Meanwhile, many American consumers continue to benefit from the booming U.S. stock market, which hit record highs this week. 

Across the Pacific, China continues to emphasize manufacturing and exports as weak domestic consumption persists. Last week, the Chinese government announced annual export growth of 7.6% in May, the largest increase in more than a year. Further, the private Caixin services purchasing managers index (PMI) came in at 54.0 in May, registering 17 straight months of expansion and the fastest growth since July 2023. (A reading above 50 suggests an expansion, while a reading below 50 indicates a contraction.) Meanwhile, CPI in China registered an annual price increase of 0.3% in May. This matched April’s increase and analyst expectations, representing the fourth straight month of price increases. Still, boosting household consumption is likely to remain difficult without a meaningful rebound in the property sector, where Chinese families traditionally store much of their wealth. 

Around the World 

50th annual G7 meeting begins in Italy as leaders work to coordinate economic policy amid rising global tensions: Leaders of the G7—the U.S., UK, Canada, Japan, Germany, Italy, and France—are in Apulia, Italy this week with much to discuss. Host Italy has organized sessions on climate change, migration, and international development, as well as a discussion on AI led by Pope Francis. But the most consequential sessions are likely to center on Russia and China. On Thursday, G7 leaders approved plans to utilize Russia’s seized oversea assets, most of which were frozen in the EU financial system, to provide up to $50 billion in additional funding for Ukraine. The decision, however, comes with several financial and legal risks. Meanwhile, Russia stated that the use of its frozen assets in this way would constitute “theft.” Leaders are also expected to issue a statement expressing concern of Chinese industrial overcapacity and may discuss imposing additional measures to level the playing field with subsidized Chinese companies.  

European elections shake-up the 27-member bloc, but likely won’t alter stance towards China: Europe’s far-right emerged as a big winner of last week’s elections for European Parliament, as voters expressed their dissatisfaction with inflation, migration, and the cost of the green transition. Far-right parties secured about one quarter of seats, up from one fifth in 2019, while liberal parties such as Renew Europe and the Greens lost seats. Still, the center held. The European People’s Party (EPP), the center-right party of Commission President Ursula von Der Leyen, remains the largest parliamentary group. And the largest parliamentary group usually begets the leader of the European Commission, who sets the EU’s policy trajectory. Thus, President Von der Leyen’s second five-year term remains a strong possibility, suggesting that the EU will likely maintain its China-skeptic stance. Von der Leyen was the first leader to coin the expression “de-risking from China”—later picked up by Washington—which calls for reducing dependence on Beijing in areas of economic vulnerabilities and paramount to the EU’s strategic autonomy. Some of China’s biggest critics were also reelected, and the EU announced new tariffs on Chinese electric vehicles on Wednesday. 

Narendra Modi’s BJP loses majority in Indian parliament, potentially undercutting his ambitious economic agenda: Ahead of this month’s elections in India, analysts and pollsters expected Prime Minister Narendra Modi's BJP government to ride the wave of 8.2% annual GDP growth to its third consecutive single-party majority. However, in surprise results, the BJP failed to win a majority and instead must form a coalition government. While Modi is expected to remain Prime Minister and India’s economic growth will continue, the loss of a majority presents new challenges to his goal of making India the world’s third-largest economy by 2027. A coalition will likely make it more difficult to quickly pass the substantial economic reforms India needs to capitalize on the current reshuffling of supply chains and sustain its rapid growth, such as in land acquisition and hiring. Business leaders who expected a clear BJP win are scrambling to understand what the new government may look like, while the Indian stock market experienced its largest plunge since 2021.  

Canada cuts interest rates as the key U.S. ally looks to capitalize on shifting global environment: High interest rates have hit the world’s 9th largest economy harder than its neighbor to the south, due to its higher household and corporate debt levels and its stronger reliance on housing to drive growth. Indeed, first quarter GDP growth in Canada fell well below analyst expectations of 2.2%, coming in at 1.7%. Meanwhile, rising geopolitical tensions present Canada with tremendous opportunities. Already a top recipient of foreign direct investment, Canada is looking to capitalize on supply-chain reshuffling and assert its role as a secure node in global supply chains and key provider of critical rare earth elements. So, many economists were relieved when the Bank of Canada beat the ECB by one day last week to become the first G7 economy to cut interest rates. Central bank officials expressed confidence that inflation was trending towards their 2% target, as annual CPI fell from 2.9% in March to 2.7% in April, while core CPI fell from 2% to 1.6%. The Canadian stock market jumped at the news. 

United States projected to triple semiconductor manufacturing capacity by 2032 due to CHIPS Act: Industrial policy can be controversial. It’s expensive, has many points of failure, and can increase geopolitical divisions, while economists have long debated its benefits and downsides. So, a recent study by the Semiconductor Industry Association and Boston Consulting Group expounding on the benefits of the 2022 CHIPS and Science Act was welcome news for industrial policy advocates. The report projects that U.S. semiconductor manufacturing capacity will grow 203% between 2022 and 2023, the largest rate of growth in the world, and that the U.S.’ share of global chip manufacturing will rise for the first time in decades, from 10% today to 14% by 2032. Absent the CHIPS Act, the report estimates the U.S.’ share of global chip manufacturing would have fallen to 8 percent by 2032. To date, the Biden Administration has announced over $29 billion in awards from the CHIPS Act. 

What We’re Watching 

  • June 28 – Department of Commerce releases U.S. personal consumption expenditures (PCE) data, the Fed’s preferred inflation gauge 
  • June 30 – France holds snap parliamentary elections, called by President Macron in a surprise move after the far-right National Rally party gained seats in the elections for European Parliament. 

  • July 4 – The United Kingdom holds a snap election, which will lead to the formation of a new government. 

Chris Borges
Program Manager and Associate Fellow, Geoeconomics Center
Kirti Gupta
Senior Adviser (Non-resident), Renewing American Innovation Project