A SOFT LANDING IN THE U.S. COULD BE HARD FOR EVERYONE ELSE / THE WALL STREET JOURNAL

A Soft Landing in the U.S. Could Be Hard for Everyone Else

Conflict in the Middle East, surging global interest rates and elevated oil prices threaten fragile recovery

By Chelsey Dulaney and Andrew Duehren

IMF Managing Director Kristalina Georgieva warned of economic divergence at meetings in Morocco this week. PHOTO: HOLLIE ADAMS/BLOOMBERG NEWS

The U.S. economy might be heading for a soft landing. 

But the rest of the world could be in for a jolt.

Global financial officials say they are grappling with an increasingly fractured economic outlook, as many countries struggle with the lasting scars of the Covid-19 pandemic while others power ahead.

Surprising strength in the U.S. economy poses a threat to the rest of the world, portending higher interest rates for longer and a stronger dollar that will weigh on other countries’ growth. 

A jump in oil prices since the summer is also threatening to reignite inflation just as many global central banks thought they were at the end of policy-tightening cycles.

International Monetary Fund Managing Director Kristalina Georgieva warned of a “deepening divergence in economic fortunes” during a week of meetings of financial officials in Marrakesh, Morocco, held just a month after the country was devastated by earthquakes. 

The outbreak of conflict between Israel and Gaza now threatens to inject volatility back into energy markets, harking back to last year’s commodity chaos after Russia’s invasion of Ukraine.

“Geopolitical tensions are the real economic risks now and we are all aware of that,” said French Finance Minister Bruno Le Maire. “Any escalation in the region would, of course, have a significant impact on global growth.”

Fragmentation

Strong U.S. economic data, including September’s blockbuster hiring report, helped send Treasury yields to 16-year highs as investors bet the Federal Reserve would keep interest rates elevated for longer. 

The IMF this week boosted its growth projections for the U.S. economy, now forecasting 2.1% growth this year and 1.5% next year, a sign of “a softer landing than earlier expected.” 

Its expectations for much of the rest of the world grew dimmer.

China’s economy has been suffering under a downturn in the property market, weak exports and lower consumer demand. 

China has weighed on Germany—the only advanced economy the IMF projects to shrink this year—and helped turn Europe into a weak link.

Total global trade is set to grow only 0.9% this year, the IMF expects, a sharp drop from 5.1% growth last year. 

The IMF is concerned that slowing global trade could mark a new era of deglobalization as nations orient economic policy toward national security rather than growth. 

Geopolitical conflicts such as Russia’s invasion of Ukraine—and friction between the U.S. and China—have already upended supply chains.

Supply disruptions not only slow growth but also have prompted investors to factor in more future risks from potential geopolitical shocks, helping drive up interest rates.

Higher for longer

The persistence of inflation continues to surprise global central banks and investors. 

The IMF boosted its inflation forecast for next year to 5.8%, up from its previous forecast of 5.2%. 

For most countries, the IMF doesn’t expect price growth to return to their central banks’ targets before 2025. 

U.S. data on Thursday showed that the recent decline in inflation stalled in September. 

Economies abroad face additional inflation risks from the rise in the dollar and higher oil prices. 

When the dollar rises, it becomes more expensive for other countries to buy foreign goods and commodities, most of which are priced in dollars. 

“Central banks do not take pleasure in just keeping interest rates higher…but because inflation has been more persistent than we thought, we are going to have to keep policy rates higher,” Lesetja Kganyago, the governor of South Africa’s central bank, said in an interview. 

South Africa’s rand has fallen 6% against the dollar over the past few months.

That is why, even as higher U.S. rates pose problems for emerging markets, some central bankers want to see American inflation tamed. 

Abdellatif Jouahri, the Moroccan central bank governor, said declining inflation in the U.S. would help Morocco control prices. 

“So all things considered, this will make our lives easier,” Jouahri said.

Emerging woes

Global officials fear rising interest rates and a stronger dollar also could usher in a new wave of debt distress across the developing world. 

The strength of the dollar is already making it more expensive for emerging-market countries to pay back dollar-denominated debts. 

The rise in interest rates makes it harder for them to issue new debt to fund themselves and refinance bonds coming due. 

“It’s a burden on very-low-income countries with a lot of debt without a lot of fiscal space,” Treasury Secretary Janet Yellen said in an interview. 

“These countries are already hurt by higher food prices, higher energy prices—spillovers from Russia’s war against Ukraine.”

Development officials warn rising debt costs are threatening vulnerable countries’ ability to spend on climate-change projects. 

According to the IMF, nearly 60% of low-income countries are in, or at risk of, debt distress, a classification that signifies a country can’t meet its debt obligations. 

Countries such as Zambia and Sri Lanka that have already defaulted on foreign bonds continue to face a long road to debt relief. 

China’s emergence as a lender to the developing world has challenged the process for resolving debt issues, which for decades has been coordinated by a group of mostly wealthy Western countries known as the Paris Club that doesn’t include Beijing.

“Many of these countries have already lost access to market financing and so their ability to finance even the most basic public spending needs is limited,” said Vitor Gaspar, director of the IMF’s fiscal affairs department. 

“That’s one of the reasons why we’re so concerned with basic priorities, like food security.”