Evelyn Reynolds

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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Inflation showed little signs of letting up in March, with a key barometer the Federal Reserve watches closely showing that price pressures remain elevated.
The personal consumption expenditures price index excluding food and energy increased 2.8% from a year ago in March, the same as in February, the Commerce Department reported Friday. That was above the 2.7% estimate from the Dow Jones consensus.

Including food and energy, the all-items PCE price gauge increased 2.7%, compared to the 2.6% estimate.
On a monthly basis, both measures increased 0.3%, as expected and equaling the increase from February.
Markets showed little reaction to the data, with Wall Street poised to open higher. Treasury yields fell, with the benchmark 10-year note at 4.67%, down about 0.4 percentage point on the session. Futures traders grew slightly more optimistic about two potential rate cuts this year, raising the probability to 44%, according to the CME Group’s FedWatch gauge.
“Inflation reports released this morning were not as a hot as feared, but investors should not get overly anchored to the idea that inflation has been completely cured and the Fed will be cutting interest rates in the near-term,” said George Mateyo, chief investment officer at Key Wealth. “The prospects of rate cuts remain, but they are not assured, and the Fed will likely need weakness in the labor market before they have the confidence to cut.”
Consumers showed they are still spending despite the elevated price levels. Personal spending rose 0.8% on the month, a touch higher even than the 0.7% estimate though the same as February. Personal income increased 0.5%, in line with expectations and higher than the 0.3% increase the previous month.

The personal saving rate fell to 3.2%, down 0.4 percentage point from February and 2 full percentage points from a year ago as households dipped into savings to keep spending afloat.
The report follows bad inflation news from Thursday and likely locks the Fed into holding the line on interest rates likely through at least the summer unless there is some substantial change in the data. The Commerce Department reported Thursday that PCE in the first quarter accelerated at a 3.4% annualized rate while gross domestic product increased just 1.6%, well below Wall Street expectations.
With inflation still percolating two years after it began its initial ascent into the highest level in more than 40 years, central bank policymakers are watching the data even more intently as they contemplate the next moves for monetary policy.
The Fed targets 2% inflation, a level that core PCE has been above for the past three years.
The Fed watches the PCE in particular because it adjusts for changes in consumer behavior and places less weight on housing costs than the more widely circulated consumer price index from the Labor Department.
While they watch both headline and core measures, Fed officials believe the ex-food and energy figure provides a better look at longer-run trends as those two categories tend to be more volatile.
Services prices increased 0.4% on the month while goods were up 0.1%, reflecting a swing back in consumer prices as goods inflation dominated since the early days of the Covid pandemic. Food prices actually showed a 0.1% decline on the month while energy rose 1.2%.
On a 12-month basis, services prices are up 4% while goods have barely moved, increasing just 0.1%. Food is up 1.5% while energy has gained 2.6%.
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Gross domestic product, a broad measure of goods and services produced in the January-through-March period, increased at a 1.6% annualized pace, below the 2.4% estimate.
The personal consumption expenditures price index, a key inflation variable for the Federal Reserve, rose at a 3.4% annualized pace for the quarter, its biggest gain in a year.
Consumer spending increased 2.5% in the period, down from a 3.3% gain in the fourth quarter and below the 3% Wall Street estimate.

U.S. economic growth was much weaker than expected to start the year and prices rose at a faster pace, the Commerce Department reported Thursday.
Gross domestic product, a broad measure of goods and services produced in the January-through-March period, increased at a 1.6% annualized pace when adjusted for seasonality and inflation, according to the department’s Bureau of Economic Analysis.

Economists surveyed by Dow Jones had been looking for an increase of 2.4% following a 3.4% gain in the fourth quarter of 2023 and 4.9% in the previous period.
Consumer spending increased 2.5% in the period, down from a 3.3% gain in the fourth quarter and below the 3% Wall Street estimate. Fixed investment and government spending at the state and local level helped keep GDP positive on the quarter, while a decline in private inventory investment and an increase in imports subtracted. Net exports subtracted 0.86 percentage point from the growth rate while consumer spending contributed 1.68 percentage points.

There was some bad news on the inflation front as well.
The personal consumption expenditures price index, a key inflation variable for the Federal Reserve, rose at a 3.4% annualized pace for the quarter, its biggest gain in a year and up from 1.8% in Q4. Excluding food and energy, core PCE prices rose at a 3.7% rate, both well above the Fed’s 2% target. Central bank officials tend to focus on core inflation as a better indicator of long-term trends.
The price index for GDP, sometimes called the “chain-weighted” level, increased at a 3.1% rate, compared to the Dow Jones estimate for a 3% increase.

Markets slumped following the news, with futures tied to the Dow Jones Industrial Average off more than 400 points. Treasury yields moved higher, with the benchmark 10-year note most recently at 4.69%.
“”This was a worst of both worlds report – slower than expected growth, higher than expected inflation,” said David Donabedian, chief investment officer of CIBC Private Wealth US. “We are not far from all rate cuts being backed out of investor expectations. It forces [Fed Chair Jerome] Powell into a hawkish tone for next week’s [Federal Open Market Committee] meeting.”
The report comes with markets on edge about the state of monetary policy and when the Federal Reserve will start cutting its benchmark interest rate. The federal funds rate, which sets what banks charge each other for overnight lending, is in a targeted range between 5.25%-5.5%, the highest in some 23 years though the central bank has not hiked since July 2023.
Investors have had to adjust their view of when the Fed will start easing as inflation has remained elevated. The view as expressed through futures trading is that rate reductions will begin in September, with the Fed likely to cut just one or two times this year. Futures pricing also shifted after the GDP release, with traders now pointing to just one cut in 2024, according to CME Group calculations.
“The economy will likely decelerate further in the following quarters as consumers are likely near the end of their spending splurge,” said Jeffrey Roach, chief economist at LPL Financial. “Savings rates are falling as sticky inflation puts greater pressure on the consumer. We should expect inflation will ease throughout this year as aggregate demand slows, although the path to the Fed’s 2% target still looks a long ways off.”
Consumers generally have kept up with inflation since it began spiking, though rising inflation has eaten into pay increases. The personal savings rate decelerated in the first quarter to 3.6% from 4% in Q4. Income adjusted for taxes and inflation rose 1.1% for the period, down from 2%.
Spending patterns also shifted in the quarter. Spending on goods declined 0.4%, in large part to a 1.2% slide in bigger-ticket purchases for long-lasting items classified as durable goods. Services spending increased 4%, its highest quarterly level since Q3 of 2021.
A buoyant labor market has helped underpin the economy. The Labor Department reported Thursday that initial jobless claims totaled 207,000 for the week of April 20, down 5,000 and below the 215,000 estimate.
In a possible positive sign for the housing market, residential investment surged 13.9%, its largest increase since the fourth quarter of 2020.
Thursday’s release was the first of three tabulations the BEA does for GDP. First-quarter readings can be subject to substantial revisions — in 2023, the initial Q1 reading was an increase of just 1.1% that ultimately was taken up to 2.2%. More