When the Group of Seven (G7) leaders get together in the Bavarian Alps this coming week for their forty-eighth annual summit, it won’t be a typical meeting. For starters, different faces will populate the “family photo”: There’s a new German chancellor and Japanese prime minister—not to mention a re-elected French president.
But more importantly, the G7 has finally flexed its muscles after watching its relevance being called into question for a decade. Now that it has brought down a heavy financial hammer against Russian President Vladimir Putin following his invasion of Ukraine, the question facing the leaders of this group—which represents around half the global economy—will be: What do they do next?
Our GeoEconomics team brings you seven data points they’ll be thinking about as they search for a path forward.
1. Core consumer price index
The leaders of the G7 economies meet precisely as their independent central bankers are beginning to take ownership of inflation. The bankers are raising interest rates with some dread: Most have spent the past eighteen months arguing that inflation is mainly being driven by supply-side shocks—the kind monetary policy is meant to ignore. Now, high energy prices and constraints on Chinese growth have led policymakers to increase the odds of a global recession. Record-high inflation in the eurozone, the United States, and the United Kingdom will feed expectations of further price increases, and central banks recognize they need to intervene to break the cycle.
Coordination is the purpose of the G7. While rates will be hiked at slightly different intervals, leaders can discuss the fiscal side. All are tempted to support households that are facing higher bills, but the countries are coming out of the pandemic with higher debt burdens. Fiscally conservative members, such as Germany and the United Kingdom, will also argue that profligate spending will cause inflation to last longer.
Will the rate hikes do enough? They are significant for economies that have become used to cheap credit over the past decade. And while the eurozone has seen negative interest rates for about that long, with inflation this high—over 8 percent in the United States and the eurozone— it’s unclear whether rates between 1.5 and 2 percent will alter expectations.2. GDP revisions
G7 economic growth has slowed by more than 2 percent compared to projections from last year. With the group now collectively forecasted to grow around 3.25 percent in 2022, a range of factors—particularly Russia’s invasion of Ukraine—are responsible for the slowdown. But even before the war, the advanced-economy recovery was in a precarious place: Inflation throughout the G7 was already rising due to imbalances in supply and demand, and exacerbated by the fiscal support governments provided during the pandemic. New lockdowns in China also played a role by worsening inflation and causing additional bottlenecks in global supply chains. The war added an additional series of supply shocks as it restricted access to Russian oil, gas, and metals, as well as Ukrainian wheat and corn. This surge in fuel and food prices has been most acutely felt in European economies. Look for coordinated action from the G7 on unblocking ports and relieving some of the pressure on food supply.
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