IMF: U.S. deficit poses 'significant risk' to global economy

According to the Financial Times, the International Monetary Fund (IMF) recently warned that the United States' huge fiscal deficit is exacerbating inflation and posing "significant risks" to the global economy.

The latest "Fiscal Monitor Report" released by the IMF shows that the U.S. fiscal deficit is expected to reach 7.1% of gross domestic product (GDP) next year, which is more than three times the average level of other developed economies. The average level of other developed economies is only 2%. The report said that large-scale U.S. spending could have a profound impact on the global economy and pose risks to other economies. Therefore, the United States urgently needs to solve the serious imbalance between expenditure and revenue.

IMF data shows that last year, the fiscal deficits of developed economies such as the Eurozone were under control, but the United States experienced a "considerable fiscal decline," with the deficit accounting for 8.8% of GDP, the highest level in 2022. More than twice as much.

The IMF said the U.S. fiscal deficit contributed 0.5 percentage points to the core inflation rate. Core inflation is a measure of price pressures excluding energy and food. This means that U.S. interest rates will need to be kept at higher levels for an extended period of time to bring inflation back to the 2% target set by the Federal Reserve.

IMF chief economist Pierre-Olivier Gourencha said that the U.S. fiscal situation is "particularly worrying," making the Federal Reserve's response to high inflation more complicated. "In the long term, this will increase fiscal and financial risks to the global economy."

Because U.S. borrowing costs are closely tied to global markets, the IMF noted that a "sudden and significant rise" in U.S. interest rates would cause global government bond yields to surge and exchange rates in emerging market and developing economies to fluctuate. "This global interest rate spillover could lead to a tightening of financial conditions and increase the risks faced by countries." An IMF analysis found that for every 1 percentage point increase in U.S. interest rates, interest rates in other advanced economies would rise by 90 basis points. Interest rates in emerging markets will rise by 1 percentage point.

In recent years, the U.S. fiscal deficit has continued to rise due to factors such as radical interest rate increases. According to the Congressional Budget Office, U.S. public debt accounted for 97% of U.S. gross domestic product at the end of 2023, and this proportion is expected to climb to 114% by 2033, reaching $45.7 trillion.

Analysis points out that the U.S. Treasury bond yield is a benchmark for global asset prices. The current uncontrolled fiscal expansion of the U.S. government will further lead to an increase in global financing costs, thereby triggering global inflationary pressure.

In the long term, the biggest risk for the snowballing accumulation of government debt by the U.S. federal government comes from debt interest, which may become one of the largest burdens on the U.S. finances in the future. The rise in the overall debt of the United States, coupled with the rising debt interest rates, will be an "unbearable burden." The United States can only make up for the hole by continuously issuing bonds and borrowing money. This will form a vicious circle, thus creating a negative impact on the global economy and finance. bring risks and hidden dangers.