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G-7 finance chiefs warn of global uncertainty as US debt crisis looms

Janet Yellen, US Treasury secretary, right, and Jeremy Hunt, UK finance minister, left, during a bilateral meeting on the sidelines of the Group of Seven (G-7) finance ministers and central bank governors meeting in Niigata, Japan, on Saturday, May 13, 2023.

Bloomberg | Bloomberg | Getty Images

Finance leaders of the Group of Seven (G-7) rich nations warned of heightening global economic uncertainty on Saturday as they wrapped up a three-day meeting overshadowed by a U.S. debt ceiling stalemate and fallout from Russia’s invasion of Ukraine.

G-7 central bank chiefs also vowed to combat “elevated” inflation and ensure expectations on future price moves remained well-anchored, a sign many of them will not let their guard down against stubbornly high inflation.

The gathering in the Japanese city of Niigata came as worries over a U.S. default fuelled uncertainty over the global outlook, already clouded by recent U.S. bank failures and signs of slowdown in China’s economy.

“The global economy has shown resilience against multiple shocks, including the COVID-19 pandemic, Russia’s war of aggression against Ukraine, and associated inflationary pressures,” the finance ministers and central bankers said in a communique after the meeting.

“We need to remain vigilant and stay agile and flexible in our macroeconomic policy amid heightened uncertainty about the global economic outlook.”

The communique made no mention of the U.S. debt ceiling stalemate, which hits markets at a time when borrowing costs are rising because of aggressive monetary tightening by U.S. and European central banks.

U.S. Treasury Secretary Janet Yellen, who has said a first-ever U.S. default could occur within weeks if the impasse is not resolved, told Reuters on Saturday the was “more difficult” than in the past but said she remained hopeful a solution could be found.

Japanese Finance Minister Shunichi Suzuki told a press conference after chairing the meeting that the debt ceiling showdown was discussed at Thursday’s dinner session on the global economy. He declined to elaborate.

Britain’s finance minister, Jeremy Hunt, said it would be “absolutely devastating” if the United States failed to reach agreement to raise the federal borrowing limit and had its economic growth “knocked off track”.

China looms

Seeking to reassure investors in the wake of recent U.S. bank failures, the G-7 finance chiefs retained their April assessment that the global financial system was “resilient.”

But they pledged in the communique to tackle “data, supervisory, and regulatory gaps in the banking system”.

Many central banks face an inflection point, with aggressive interest rate

hikes beginning to cool growth and unsettling the banking system.

Bank of Japan Governor Kazuo Ueda, who chaired the meeting’s discussion on monetary policy, said most central banks appeared to feel the impact of past interest rate hikes had yet to show fully as they look to guide future monetary policy.

“Many said they wanted to guide monetary policy taking that point in mind,” he said at the press conference with Suzuki.

The group reiterated its condemnation of Russia’s invasion of Ukraine and pledge to strengthen monitoring of cross-border transactions between Russia and other countries.

China has also been on the G=7’s minds, with Japan spearheading efforts to diversify supply chains and reduce their heavy reliance on the world’s second-biggest economy.

The finance leaders set a year-end deadline for launching a new scheme to diversify global supply chains in their communique.

The new scheme envisages the G-7 offering aid to low- and middle-income countries so they can play a bigger role in supply chains for energy-related products, such as by refining minerals and processing manufacturing parts.

“Diversification of supply chains can contribute to safeguarding energy security and help us to maintain macroeconomic stability,” the communique said, adding that the scheme will be launched “by the end of this year at the latest.”

The communique did not mention an idea, flagged by the United States, to consider imposing targeted restrictions on investments to China to combat Beijing’s use of “economic coercion” against other countries.

But it said G-7 countries will work to ensure foreign investment in critical infrastructure “does not undermine the economic sovereignty of host countries.”

The discussions among the finance leaders will lay the groundwork for the G-7 summit starting on Friday in Hiroshima, where concern about China’s use of “economic coercion” in its dealings abroad will be among key topics of debate.

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