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Given the current global climate of high inflation, analysts around the world are closely focused on central banks. Accordingly, the Bank of International Settlements (BIS), known as the “central bank for central banks,” is a focal point as well. Last week, the BIS published its annual economic report, which included a warning for governments around the world: rising deficit levels pose a major threat to global financial stability and taming inflation. The post-COVID era of high-interest rates is sending debt servicing costs soaring, while high government spending stimulates the economy and may buoy inflation.
U.S. Fed Chair Jerome Powell agrees. In a speech last week, he warned that the U.S. economy is currently too strong to justify running such high deficits, stating that “the path we are on is unsustainable.” At the same time, Powell hailed the United States’ progress on taming inflation. The consumer price index (CPI) registered an annual price increase of 3% in June, a drop from 3.3% in May. Prices decreased by 0.1% on a monthly basis, while core CPI in June came in at 3.3%, the lowest level since April 2021 and a slight drop from 3.4% registered in August. Combined with the last job report, analysts are increasingly optimistic that the Fed will cut interest rates in September. In June, the U.S. labor market added 206,000 jobs while the unemployment rate rose to 4.1%. Fed officials have indicated that a weakening labor market could prompt a rate cut.
Across the Atlantic in the Eurozone, overall inflation eased slightly in June, though services inflation remained strong. CPI in the 20-member bloc fell from 2.6% in May to 2.5% in June, while core CPI remained level at 2.9%. Services inflation, which includes services such as restaurant meals, tourism, and healthcare, remained level at 4.1%. Policymakers at the European Central Bank (ECB) worry this continued rise in prices for services is fueled by wage growth, and therefore won’t cool until workers stop securing large pay increases. Indeed, the BIS warned earlier this week that services price growth may remain hot for longer than anticipated. After cutting interest rates in its last meeting in early June, the ECB meets next on July 18th.
Meanwhile, leaders in China are preparing for the Third Plenum of the Chinese Communist Party’s Central Committee. This annual meeting, so named because it is the third meeting of the committee’s five-year term, is the most important economic meeting of the year in China, during which the Central Committee sets out an economic road map for the next five-year cycle. The committee has numerous problems to address, including cratering consumer confidence. While many nations have struggled with inflation recently, China has struggled with deflation as consumers save instead of spend: CPI registered an annual price increase of 0.2% in June, a slight decrease from the 0.3% annual price growth in May. China is instead relying on exports to fund its growth—in June, it posted a record $99 billion trade surplus. The glut of cheap goods flooding global markets is contributing to heightening tensions between China and many of its trading partners.
United States targets Chinese firms with tariffs on steel and aluminum imported from Mexico: As the United States has imposed more and more tariffs on Chinese exports in the last few years, Chinese firms have searched for workarounds. One such workaround has been shipping through Mexico: Chinese goods that enter the United States through Mexico can avoid the tariffs, and Chinese firms are increasingly establishing manufacturing operations in Mexico. Indeed, Chinese shipping to Mexico soared by 28% in the first three quarters of 2023 compared to the same period the year before, and China has doubled its investments in Mexico since 2018. The United States is now working to close this loophole. This week, the Biden Administration announced new duties of 25% on any steel from Mexico that was not melted and poured in North America, and 10% on aluminum from Mexico that contained primary smelt from China, Belarus, Iran, or Russia. Per the White House, the action is being taken jointly with Mexico, which will require more information from importers about the origins of their steel and aluminum products.
Indian Prime Minister Modi visits Moscow to strengthen economic ties in hedge against China: Indian Prime Minister Narendra Modi was in Moscow on Tuesday, balancing his close relationship with the United States while embracing Russian President Valdimir Putin. For Russia, India represents a destination for oil exports (which have increased 13-fold since 2021) and a vital source of funding for its war effort. For India, Russia is a crucial supplier of weaponry and cheap energy that it sees as essential for its economic development. But their relationship is further complicated by India’s rival: China. As Russia’s isolation from the west has endured, its reliance on China has grown. By expanding economic ties with Russia, India may be seeking to keep Russia from growing overly dependent on China. Indeed, following the visit, officials announced a goal of increasing annual trade volumes to $100 billion by 2030 and diversifying economic relations beyond the energy sector. Despite this, however, experts emphasize that India remains heavily invested in its relationship with the United States.
Protests rock Kenya as China looks to seize on looming debt crises in developing nations: East Africa’s most advanced economy is reeling from protests over the last several weeks that left at least 39 people dead and Parliament on fire. The protests were sparked by a proposed tax bill on everyday items, such as bread and feminine hygiene products, intended to generate revenue to service payments on Kenya’s $80 billion in debt. Though facing high youth unemployment and deep economic inequality, Kenya spends about 60% of its revenue on debt payments. While the government withdrew the bill, an uneasy truth remains: many Kenyans have lost faith in global financial institutions such as the World Bank and IMF. And Kenya is not the only developing nation in this position—the IMF reported last fall that more than half of low-income developing countries are in or at high risk of debt distress. Without a concerted effort to address this growing issue in the developing world, Western-led institutions risk ceding ground to China, which is looking to capitalize on this lost faith in Western institutions by offering rescue loans. Boston University estimates that from 2000-2022, Chinese lenders loaned over $170 billion to nearly 50 African governments.
Saudi Arabia continues to emerge as a geoeconomic actor, considers offloading European debt in response to moves against Russia: Per Bloomberg, Saudi financial officials have considered offloading its holdings of European debt in response to the G7’s recent decision to use the profits generated by Russia’s blocked assets to support Ukraine. The Kingdom has denied issuing any direct threats and Saudi Arabia’s holdings of European bonds are likely not sufficient to negatively affect the markets. Further, Saudi Arabia’s motive remains unclear—it may oppose setting such a precedent or simply might sympathize with Russia. Nevertheless, while Saudi Arabia will most likely maintain its exposure to Western financial systems (especially given the dollar’s role in the oil market and the lack of viable alternatives), it has nonetheless emerged as an influential geoeconomic actor, leveraging its finance and trade presence to navigate an increasingly fragmented geoeconomic order.
United States announces next round of funding for critical technology innovation hubs: Last week, the Biden Administration awarded $504 million to 12 Regional Technology and Innovation Hubs aiming to bolster the production of critical technologies across the country. Award recipients include a biotech hub in central Indiana, a semiconductor hub in upstate New York, and an artificial intelligence hub in Oklahoma. The funding represents continued investment by the United States to accelerate the growth of advanced industries and expand its technology base to new geographies. Still, some experts argue that, while a valuable early investment, the funding is insufficient to cultivate substantial development. Congress authorized $10 billion in tech hub funding in the CHIPS and Science Act, yet only $541 million, or 5%, has been appropriated so far.
July 18 – The European Central Bank meets to decide on interest rates.
July 28 – Venezuelan holds presidential elections. Late last year current President Maduro agreed to hold elections with international observers in exchange for sanctions relief from the United States. While the Maduro regime reneged on some of these promises, observers still expect it to be difficult for him to win reelection.
July 30 – The U.S. Federal Reserve meets to decide on interest rates.
