Pressure on budgets starts to bite amid upheaval, and other key economic news to know

Fiscal strains are emerging across the global economy, as governments’ grand plans for borrowing bump up against hardening resistance in sovereign bond markets.

The US remains firmly in the eye of the brewing storm. President Donald Trump’s tax bill, currently making its way through Congress, would extend sweeping tax cuts introduced in 2017 – pushing annual budget deficits up to an estimated 6.9% of GDP, and the debt burden to a record 125% of GDP by 2034.

Mounting worries about debt levels are by no means restricted to the US. The International Monetary Fund’s latest Fiscal Monitor projects that global public debt will rise above its pandemic-era peak by the end of this decade amid elevated policy uncertainty, exceeding 100% of GDP. A third of the world’s economies are expected to see their debt burdens increase already before the end of this year, including the US, China and Brazil.

Emerging and low-income economies are particularly exposed. In Africa, external debt repayments are mounting at the same time that aid inflows are declining. The economist Joseph Stiglitz warned that the mounting developing-economy debt crisis will choke off much-needed investment in health, education and infrastructure.

Debt concerns in advanced economies are also rising. In the World Economic Forum’s latest survey of chief economists, respondents were equally worried about debt sustainability in these places as they were about the developing world, a marked shift from previous assumptions that advanced economies were less exposed.

The OECD now expects its largely advanced-economy membership to see debt burdens rise to an average of 114% of GDP next year. It cited increasing borrowing for defence spending, supporting ageing populations, and climate adaptation, as well as high interest rates. It also noted that most countries are delaying significant moves to reduce debt and deficits.

The fiscal outlook is likely to remain a central source of economic risk and realignment in the months ahead, particularly as investors become more anxious about debt trajectories.

There has been a marked increase in sovereign bond yields in recent months, as investors have pulled back from government debt. In effect, these yields measure risk and represent the interest rate governments must pay to borrow. They move inverse to prices, so bond sell-offs push prices down and yields up.

In the US, 30-year Treasury yields have risen above 5% and the country’s debt was recently downgraded by one of the world’s biggest credit rating agencies, Moody’s. Meanwhile, a growing chorus of senior financiers is calling for a rapid course correction to rein in the fiscal position.

In Japan, the surge in bond yields has been particularly dramatic. 30-year yields jumped from 2.3% at the start of the year to 3.2% in late May. If that is sustained, it could be highly disruptive for a government carrying significant debt equal to around 250% of GDP.

As it becomes clearer that heightened global uncertainty is here to stay, there are growing signs that economic and commercial activity is adapting.

In Africa, driven partly by growing fiscal strains, many governments are responding by trying to bolster domestic and regional ties – accelerating the implementation of a landmark continental free-trade agreement (AfCFTA), building regional value chains, and harnessing local sources of capital.

Meanwhile, at a recent ASEAN-GCC-China summit, countries representing over a quarter of global GDP announced plans to deepen their financial and economic integration, through increased local-currency trading, expanded infrastructure development under China’s Belt and Road initiative, and accelerated regional financial integration.

The trend towards experimentation and adaptation is also evident in global manufacturing. Rising tariffs, geopolitical frictions and supply-chain disruptions are pushing companies to rethink their global footprints, with the focus shifting from cost to diversification, automation, flexibility and regionalization.

There is little evidence yet of the frequently heralded death of globalization. But we are definitely in an era of economic evolution, with global activity finding new pathways in response to changing national and regional imperatives.