G7 and the growing concern about the recession in the US

Reuters:The Group of Seven (G7) finance leaders convened on Thursday (11 May) amidst a standoff concerning the US debt ceiling, intensifying concerns of a US recession while central banks strive for a smooth landing for the global economy.

President Joe Biden exerted pressure on Republican lawmakers on Wednesday, urging swift action to raise the limit on government borrowing from the current $31.4 trillion. Failure to do so would risk plunging the world's largest economy into recession.

At the G7 meeting in Niigata, Treasury Secretary Janet Yellen was anticipated to face inquiries from her counterparts regarding Washington's strategy to prevent market turbulence, which has already been jittery following the recent collapse of three US regional banks.

Yellen's presence at the Japanese-hosted G7 finance meeting this week has been overshadowed by a partisan dispute over the US debt ceiling, posing a threat of a new financial crisis and obstructing a significant tax agreement blocked by Republicans.

Yellen expressed her concerns in Niigata on Thursday, stating, "A default would threaten the gains that we've worked so hard to make over the past few years in our pandemic recovery. And it would spark a global downturn that would set us back much further."

The US debt crisis presents a predicament for Japan, the current G7 chair and the world's largest holder of US debt.

In response to the Treasury's warning that the government could face a cash shortage to meet its obligations by June, President Joe Biden summoned the four top congressional leaders to the White House for a meeting next week.

Japan's top financial diplomat, Masato Kanda, suggested on Tuesday that the G7 finance leaders might discuss the US debt ceiling but would likely avoid explicitly mentioning it in their joint statement at the conclusion of the meeting on Saturday.

Takahide Kiuchi, an analyst at Nomura Research Institute, commented, "The G7 won't be able to come up with a solution for what is a purely domestic and political US problem, though the group could reaffirm its resolve to cooperate in stabilizing markets in the worst-case scenario. Washington is solely responsible to get this fixed. But when things go wrong, all the other countries bear the brunt."

Dampening global economic outlook

The G7 finance ministers and central bankers are expected to address global economic risks, such as persistent inflation and the repercussions of aggressive interest rate hikes in the US and Europe.

Yellen noted that the global economy was in a "better place than many had predicted six months ago," with inflation easing in numerous G7 countries, including the United States.

Nevertheless, as the Federal Reserve's rapid rate hikes weigh on the US economy, recent data has indicated signs of weakness in China, the world's second-largest economy.

Data released on Thursday revealed that China's consumer prices in April rose at the slowest pace in over two years, while factory gate deflation deepened. This dashed policymakers' hopes of a rebound in the country's demand, which was expected to support global growth.

Additional key topics to be discussed at the G7 finance gathering include strengthening the global financial system, preventing Russia from evading sanctions related to its invasion of Ukraine, and diversifying supply chains by partnering with low- and middle-income nations to reduce dependence on countries like China.

Previous battles over the US debt ceiling typically culminated in last-minute agreements, avoiding an unprecedented default. The 2011 scramble resulted in the first-ever downgrade of the top-notch US credit rating. Those who experienced that episode caution that the current situation is riskier due to widening political divisions.

During the 2011 incident, the G7 finance leaders stated in a joint statement that they were “committed to addressing the tensions stemming from the current challenges on our fiscal deficits, debt and growth.”