Optimism over US debt ceiling deal, and other economy stories you need to read this week

US President Joe Biden and House of Representatives Speaker Kevin McCarthy, the top Republican in Washington, hope to finalize a deal on the debt ceiling after Biden returns from the Group of Seven meeting in Japan on 21 May.

McCarthy said a bill to raise the US debt ceiling could be put to a vote as early as next week, offering hope that the White House and Congress will strike a deal to avert default ahead of the 1 June deadline, the Financial Times reported.

“We’re not there, we haven’t agreed to anything yet. But I see the path that we can come to an agreement,” McCarthy told reporters on Capitol Hill on 18 May. “I think we have a structure now and everybody's working hard. I mean we're working two or three times a day, then going back getting more numbers,” he continued.

Several months of standoff over the government's debt ceiling has brought the nation close to the brink of default and economic crisis.

What is the debt ceiling?

Washington regularly sets a limit on federal borrowing. Currently, the ceiling is set at $31.4 trillion, equal to roughly 120% of the country's annual economic output. The debt reached that point in January and the Treasury has kept obligations just within the limit by suspending investments in some federal pension funds while continuing to borrow from investors.

The Treasury warned last week it may have to stop borrowing altogether and rely solely on tax receipts to pay its bills by as soon as 1 June. However, it also said this cut-off, known as the "X-date", could occur several weeks later.

Because the Treasury borrows close to 20 cents for every dollar it spends, Washington at that point would start missing payments owed to lenders, citizens or both.

Treasury Secretary Janet Yellen and other policy experts have called on Washington to eliminate the limit, because it amounts to a bureaucratic stamp on decisions already made.

Global debt rose by $8.3 trillion in the first three months of this year compared with the end of 2022, pushing it to $304.9 trillion – its second-highest quarterly reading ever, and the highest level since the first quarter of last year.

This is according to the Institute of International Finance's (IIF) Global Debt Monitor, which says global debt is now $45 trillion higher than its pre-pandemic level and is expected to continue rising rapidly.

Ageing populations and rising healthcare costs continue to put spending pressure on governments, while "heightened geopolitical tensions are also expected to drive further increases in national defence spending over the medium term", according to IIF researchers.

Rating agencies Moody’s, S&P and Fitch have also warned that demographic changes are impacting governments’ credit ratings, The Financial Times reports. Significant policy reforms to address fiscal matters or ageing populations in many nations are needed if government debt is to remain sustainable, according to Marko Mrsnik, Lead Sovereign Analyst at S&P Global Ratings.

The IIF report also says that rapid rises in interest rates have impacted the balance sheets of some banks, and the resulting tighter lending practices among smaller banks would hit some businesses and households harder.

Higher interest rates are likely to have consequences for property-related debt, as well as impact the sustainability of sovereign and corporate debt, according to the World Economic Forum's latest Chief Economists Outlook.

According to the IIF, 75% of emerging markets saw an increase in debt levels in dollar terms in the first quarter, with the overall figure crossing $100 trillion for the first time. China, Mexico, Brazil, India and Turkey posted the biggest increases.

The UN has raised its projection for global economic growth to 2.3% for 2023, up by 0.4 percentage points from a January forecast. It says the outlook for the US, EU and China has improved, but that growth prospects have deteriorated for many developing countries because of tightening credit conditions and rising costs of external financing.

British consumer confidence has risen for the fourth month in a row to its highest in 15 months as households take a more positive view of the economy and their finances, despite inflation still in double digits. Market research firm GfK's headline confidence index rose to -27 in May from -30 in April, moving further away from the -49 record low last September.

Eurozone inflation ticked up to 7.0% in April from 6.9% a year earlier, as rising services and energy costs offset a slowdown in food price growth. Core inflation – which excludes volatile food and fuel prices – slowed to 7.3%, from 7.5% a year earlier. The European Central Bank has lifted interest rates by a combined 375 basis points since last July to try and arrest runaway price growth.

China's fiscal revenue rose 11.9% on the year in January-April, accelerating sharply from a 0.5% rise in January-March, official data showed. The world's second-largest economy is staging a gradual but uneven recovery following three years of stringent COVID-19 curbs. April data suggested the economy lost momentum at the beginning of the second quarter.

Japan's economy emerged from recession and grew faster than expected in the first quarter of 2023 as a post-COVID consumption rebound offset global headwinds, shoring up hopes for a sustained recovery. The world's third-largest economy grew by an annualized 1.6% in January-March, exceeding market forecasts of a 0.7% gain and marking the first rise in three quarters.

And Japan's stock markets hit a 33-year high this week. Japanese stocks have outperformed all major markets this year other than the tech-focused Nasdaq, with the Nikkei rising more than 11% in dollar terms against a 7% gain for world stocks. The country is benefiting from hopes of improved governance standards and a belief it offers a safe way of gaining exposure to China, but with less geopolitical risk, The Financial Times says.

US bankers are increasing their risk management, monitoring and emergency procedures around the use of social media after an internet-fuelled bank run toppled Silicon Valley Bank two months ago and sparked turmoil in the industry. Executives are devising programmes and plans to counteract online threats, including rumours around the health of the banks that could lead to deposit outflows or weigh on stock.

The International Monetary Fund's executive board has approved a $3 billion, three-year loan program for Ghana, allowing for an immediate disbursement of about $600 million and a potential path out of the West African country's worst economic crisis in a generation. Ghana's debt is currently unsustainable, but a restructuring plan targets $10.5 billion of external debt service relief from 2023 to 2026.

Australia's employment rate unexpectedly dipped in April after two months of outsized gains, and the jobless rate also ticked up in a sign the labour market might be cooling. This could bolster the case for a pause in interest rate hikes next month.

Uncertainty seems to be the only certainty left when it comes to assessing the global economic outlook. Economists are not just divided on the prospects of a worldwide recession in 2023, but they are about as divided as it is possible to be: 45% think it is likely, while 45% think it is unlikely. That's one of the findings of the World Economic Forum’s latest Chief Economists Outlook.

One top economist who has expressed optimism about the global economy is Christian Keller, the Head of Economic Research at Barclays. He joined Radio Davos in early May to discuss the impact of rising interest rates, recent banking-sector turmoil and governments shifting towards more robust industrial policy.

More estimates are emerging of the potential productivity benefits of AI on specific occupations or tasks. One finds that software engineers can code up to twice as fast using a tool called Codex, while another shows that many writing tasks can be completed twice as fast. A third claims that economists can be 10-20% more productive using large language models.