Evelyn Reynolds

High U.S. interest rates traditionally spell bad news for emerging markets, making their debts — which are often priced in U.S. dollars — more expensive.
They can also trigger capital outflows, as investors opt for better returns in the U.S., and can cause much tighter financial conditions.

International Monetary Fund (IMF) Managing Director Kristalina Georgieva speaks during a briefing on the Global Policy Agenda at IMF headquarters during the IMF/World Bank Spring Meetings in Washington, DC on April 18, 2024.
Mandel Ngan | Afp | Getty Images

Kristalina Georgieva, the managing director of the International Monetary Fund, played down the prospect of any negative impact from a monetary policy divergence between Europe and the U.S., but said issues could be more acute in emerging markets.
The benchmark rates of most advanced economies soared in recent years, as central banks aimed to tame inflation following the Covid-19 pandemic. These banks are now looking to bring rates back down as economies cool off, although signals in the U.S. suggest that cuts might still be some months away.

A high U.S. interest rate environment is traditionally bad news for emerging markets, as it makes their debts — often priced in U.S. dollars — more expensive. It can also trigger capital outflows, as investors opt for better returns in the U.S., and can cause much tighter financial conditions.
“It is a much more serious issue for countries where the impact of high interest rates in the United States are more profound — in many emerging market economies,” Georgieva told CNBC’s Silvia Amaro in Brussels on Monday.
“We also see some of this in Japan, and there the attention of policymakers, indeed, has to be sharpened to carefully monitor where the volatilities are becoming more significant. In Europe, this is not the case.”

In the euro zone, she said that “we are not too worried about the exchange rate impact,” adding that the IMF’s analysis showed that the 50 basis points difference between the rates of the U.S. Federal Reserve and those of the European Central bank “is likely to lead to miniscule or 0.1 to 0.2% shift in the exchange rate.”
“And that is to say that here [in Europe] this is not a big issue,” she said. More

In early April, reports emerged that The Line project, a planned glass-walled city meant to stretch for 105 miles across the Saudi desert by 2030, would be a length of just 1.5 miles by that time — a reduction of 98.6%.
“For NEOM, the projects, the intended scale is continuing as planned. There is no change in scale,” Saudi Economy Minister Faisal Al Ibrahim told CNBC in Riyadh.

Saudi Arabia’s economy minister rejected recent reports that the kingdom’s $1.5 trillion NEOM megaproject, a futuristic desert development on the Red Sea coast, is scaling back some of its plans.
“All projects are moving full steam ahead,” Faisal Al Ibrahim told CNBC’s Dan Murphy on Monday at the World Economic Forum’s special meeting in Riyadh.

“We set out to do something unprecedented and we’re doing something unprecedented, and we will deliver something that’s unprecedented.”
In early April, reports emerged in Western media outlets that The Line project, a planned glass-walled city meant to stretch for 105 miles across the desert by 2030, would be a length of just 1.5 miles by that time — a reduction of 98.6%. Citing anonymous sources with knowledge of the matter, the initial report by Bloomberg said that the Saudi government’s original plan to have 1.5 million people living in The Line by 2030 was slashed to 300,000.
The purported scaling back of plans, at least in the medium-term, comes amid reported concerns over finances for NEOM, which is part of the kingdom’s broader Vision 2030 initiative to diversify its economy away from oil. Saudi Arabia’s sovereign wealth fund, the Public Investment Fund, has not yet approved NEOM’s budget for 2024, according to Bloomberg’s report.
Al Ibrahim stressed that the projects would be delivered according to plan, but with the qualification that decisions were being made for “optimal economic impact.”
“We see feedback from the market, we see more interest from the investors and we’ll always prioritize to where we can optimize for optimal economic impact,” he said.

“Today the economy in the kingdom is growing faster, but we don’t want to overheat it. We don’t want to deliver these projects at the cost of importing too much against our own interest. We will continue delivering these projects in a manner that meets these priorities, delivers these projects and has the optimal healthy impact for our economy and the … healthy non-oil growth within it.”

NEOM political map of the 500 billion dollar megacity project in Saudi Arabia along the Red Sea coast. Location of the smart and tourist city with autonomous judicial system. English labeling. Vector.
Peterhermesfurian | Istock | Getty Images

Still, the minister emphasized that “for NEOM, the projects, the intended scale is continuing as planned. There is no change in scale.”
“It is a long-term project that’s modular in design,” he said. “The rest of the mega projects are there to be delivered for specific impact in specific sectors.”
Asked what kind of a message the reported timeline and scale changes would send to private investors, Al Ibrahim said that decisions would be made to suit the needs and returns of the projects, and that all the developments within NEOM are seeing growing investor interest.
“Keep in mind that these sectors didn’t exist in the past. They’re being built from scratch. They require some investment and going all in from the government and the sovereign wealth fund,” he said.
“And we’re seeing increased investor interest on all of these projects. These projects will be delivered to their scale and in a manner that in terms of priorities suits the needs of the projects, the returns of these projects, and the economic impact. It’s like minimizing any leakage, minimizing any overheating risks as well.” More

Borge Brende, president of the World Economic Forum, gave a stark outlook for the global economy.
He said governments needed to consider how to reduce that debt and take the right fiscal measures without getting into a situation where it kicks off a recession.
He also motioned persistent inflationary pressures and that generative artificial intelligence could be an opportunity for the developing world.

Borge Brende, president of the World Economic Forum, gave a stark outlook for the global economy saying the world faces a decade of low growth if the right economic measures are not applied.
Speaking Sunday at WEF’s “Special Meeting on Global Collaboration, Growth and Energy for Development” in Riyadh, Saudi Arabia, he warned that global debt ratios are close to levels not seen since the 1820s and there was a “stagflation” risk for advanced economies.

“The global growth [estimate] this year is around 3.2 [%]. It’s not bad, but it’s not what we were used to — the trend growth used to be 4% for decades,” he told CNBC’s Dan Murphy, adding that there was a risk of a slowdown like that seen in the 1970s in some major economies.
“We cannot get into a trade war, we still have to trade with each other,” he explained when asked about avoiding a period of low growth.
“Trade will change and global value chains — there will be some more near-shoring and friend-shoring — but we shouldn’t lose the baby with the bathwater … Then we have to address the global debt situation. We haven’t seen this kind of debt since the Napoleonic Wars, we are getting close to 100% of the global GDP in debt,” he said.
He said governments needed to consider how to reduce that debt and take the right fiscal measures without getting into a situation where it kicks off a recession. He also motioned persistent inflationary pressures and that generative artificial intelligence could be an opportunity for the developing world.

Borge Brende, president of the World Economic Forum (WEF).
Bloomberg | Bloomberg | Getty Images

His warning chimes with a recent report from the International Monetary Fund which noted that global public debt had edged up to 93% of GDP last year, and was still 9 percentage points higher than pre-pandemic levels. The IMF projected that global public debt could near 100 % of GDP by the end of the decade.

The Fund also singled out the high debt levels in China and the United States, saying loose fiscal policy in the latter puts pressure on rates and the dollar which then pushes up funding costs around the world —exacerbating pre-existing fragilities.
Earlier this month, the International Monetary Fund raised its global growth forecast slightly, saying the world economy had proven “surprisingly resilient” despite inflationary pressures and monetary policy shifts. It now expects global growth of 3.2% in 2024, up by a modest 0.1 percentage point from its earlier January forecast.
WEF’s Brende said Sunday that the biggest risk for the global economy is now “the geopolitical recession that we are faced with,” highlighting recent Iran-Israel tensions.
“There is so much unpredictability, and you can easily get out of control. If Israel and Iran escalated that conflict, we could have seen an oil price of $150 overnight. And that would of course be very damaging for the global economy,” he said. More

Commerce Department indexes that the Fed relies on heavily for inflation signals showed prices continuing to climb at a rate still considerably higher than the 2% annual goal.
The stubborn inflation data raised several ominous specters, namely that the Fed may have to keep rates elevated for longer or even have to hike at some point.
Thus far, the economy has managed to avoid broader damage from the inflation problem, though there are some notable cracks.

A customer shops for food at a grocery store on March 12, 2024 in San Rafael, California.
Justin Sullivan | Getty Images News | Getty Images

The last batch of inflation news that Federal Reserve officials will see before their policy meeting next week is in, and none of it is very good.
In the aggregate, Commerce Department indexes that the Fed relies on for inflation signals showed prices continuing to climb at a rate still considerably higher than the central bank’s 2% annual goal, according to separate reports this week.

Within that picture came several salient points: An abundance of money still sloshing through the financial system is giving consumers lasting buying power. In fact, shoppers are spending more than they’re taking in, a situation neither sustainable nor disinflationary. Finally, consumers are dipping into savings to fund those purchases, creating a precarious scenario, if not now then down the road.
Put it all together, and it adds up to a Fed likely to be cautious and not in the mood anytime soon to start cutting interest rates.

“Just spending a lot of money is creating demand, it’s creating stimulus. With unemployment under 4%, it shouldn’t be that surprising that prices aren’t” going down, said Joseph LaVorgna, chief economist at SMBC Nikko Securities. “Spending numbers aren’t going down anytime soon. So you might have a sticky inflation scenario.”
Indeed, data the Bureau of Economic Analysis released Friday indicated that spending outpaced income in March, as it has in three of the past four months, while the personal savings rate plunged to 3.2%, its lowest level since October 2022.

At the same time, the personal consumption expenditures price index, the Fed’s key measure in determining inflation pressures, moved up to 2.7% in March when including all items, and held at 2.8% for the vital core measure that takes out more volatile food and energy prices.

A day earlier, the department reported that annualized inflation in the first quarter ran at a 3.7% core rate in the first quarter in total, and 3.4% on the headline basis. That came as real gross domestic product growth slowed to a 1.6% pace, well below the consensus estimate.

Danger scenarios

The stubborn inflation data raised several ominous specters, namely that the Fed may have to keep rates elevated for longer than it or financial markets would like, threatening the hoped-for soft economic landing.
There’s an even more chilling threat that should inflation persist central bankers may have to not only consider holding rates where they are but also contemplate future hikes.
“For now, it means the Fed’s not going to be cutting, and if [inflation] doesn’t come down, the Fed’s either going to have to hike at some point or keep rates higher for longer,” said LaVorgna, who was chief economist for the National Economic Council under former President Donald Trump. “Does that ultimately give us the hard landing?”
The inflation problem in the U.S. today first emerged in 2022, and had multiple sources.
At the beginning of the flare-up, the issues came largely from supply chain disruptions that Fed officials thought would go away once shippers and manufacturers had the chance to catch up as pandemic restrictions eased.
But even with the Covid economic crisis well in the rearview mirror, Congress and the Biden administration continue to spend lavishly, with the budget deficit at 6.2% of GDP at the end of 2023. That’s the highest outside of the Covid years since 2012 and a level generally associated with economic downturns, not expansions.

On top of that, a still-bustling labor market, in which job openings outnumbered available workers at one point by a 2 to 1 margin and are still at about 1.4 to 1, also helped keep wage pressures high.
Now, even with demand shifting back from goods to services, inflation remains elevated and is confounding the Fed’s efforts to slow demand.

Fed officials had thought inflation would ease this year as housing costs subsided. While most economists still expect an influx of supply to pull down shelter-related prices, other areas have cropped up.
For instance, core PCE services inflation excluding housing — a relatively new wrinkle in the inflation equation nicknamed “supercore” — is running at a 5.6% annualized rate over the past three months, according to Mike Sanders, head of fixed income at Madison Investments.
Demand, which the Fed’s rate hikes were supposed to quell, has remained robust, helping drive inflation and signaling that the central bank may not have as much power as it thinks to bring down the pace of price increases.
“If inflation remains higher, the Fed will be faced with the difficult choice of pushing the economy into a recession, abandoning its soft-landing scenario, or tolerating inflation higher than 2%,” Sanders said. “To us, accepting higher inflation is the more prudent option.”

Worries about a hard landing

Thus far, the economy has managed to avoid broader damage from the inflation problem, though there are some notable cracks.
Credit delinquencies have hit their highest level in a decade, and there’s a growing unease on Wall Street that there’s more volatility to come.
Inflation expectations also are on the rise, with the closely watched University of Michigan consumer sentiment survey showing one- and five-year inflation expectations respectively at annual rates of 3.2% and 3%, their highest since November 2023.
No less a source than JPMorgan Chase CEO Jamie Dimon this week vacillated from calling the U.S. economic boom “unbelievable” on Wednesday to a day letter telling The Wall Street Journal that he’s worried all the government spending is creating inflation that is more intractable than what is currently appreciated.
“That’s driving a lot of this growth, and that will have other consequences possibly down the road called inflation, which may not go away like people expect,” Dimon said. “So I look at the range of possible outcomes. You can have that soft landing. I’m a little more worried that it may not be so soft and inflation may not go quite the way people expect.”
Dimon estimated that markets are pricing in the odds of a soft landing at 70%.
“I think it’s half that,” he said.

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