A warning from the International Monetary Fund (IMF) about the impact of ‘sticky’ US inflation and a potential delay in Federal Reserve rate cuts on the global economy has raised concerns about the increasing debt pile in the US under President Joe Biden’s administration. The IIF highlighted the risk of a dollar rally leading to government debt strains, especially for developing countries.
Household balance sheets in the US may provide some protection against rising interest rates, but government budget deficits remain high compared to pre-pandemic levels. This could lead to fiscal pressures for households and businesses, potentially hindering economic growth and investment flows. The IMF echoed these concerns, urging governments worldwide to show fiscal restraint and maintain sound public finances, especially in an election year with the temptation to cut taxes or increase spending.
The IIF also raised concerns about rising trade frictions and geopolitical tensions affecting the external debt servicing capacity of emerging markets that have high levels of dollar-denominated debt. Stubborn inflation, particularly in the US, poses a significant risk by increasing global funding costs. Additionally, trade disputes and protectionist policies could hinder economic growth and investment flows, further impacting the ability of emerging and frontier markets to service their debts.
In conclusion, while household balance sheets in the US may provide some protection against rising interest rates, government budget deficits remain high compared to pre-pandemic levels. Governments worldwide must show fiscal restraint and maintain sound public finances while addressing geopolitical tensions and rising trade frictions that pose risks to emerging markets with high levels of dollar-denominated debt.