The Leading Position of the US Economy Among Wealthy Nations
The US economy has outpaced other advanced nations like the EU, UK, Japan, and Canada this year, with potential for further growth despite a slowdown in US GDP Factors like energy prices, fiscal and monetary policy, China's slowdown, and the upcoming AI boom contribute to this economic advancement
Not all pandemic recoveries are created equal.
The worlds richest economies have taken diverging paths in recuperating from the devastating effects of Covid-19.
Amidst various challenges such as wars, geopolitical tensions, the lingering impact of the pandemic, and economic difficulties, global growth has faced significant strain. Despite this, there have been a few areas of positive economic performance, with the United States standing out. The US economy experienced an impressive 5.2% growth in the third quarter, surpassing China, which has long been a major driver of global economic expansion.
According to Innes McFee, chief global economist for Oxford Economics, the US has significantly outperformed other countries over the past year. It has surpassed the European Union, the United Kingdom, Japan, Canada, and other advanced economies.
The Organisation for Economic Co-operation and Development, based in Paris, recently revised its forecasts for US growth upward for this year and next, while also lowering the outlook for the 20 countries that use the euro currency. This adjustment comes after the International Monetary Fund in Washington made similar changes in October.
The IMF has revised its forecast for US GDP growth, now expecting it to expand by 2.1% this year and 1.5% in 2024. These rates are more than double the growth rates predicted for the UK economy and surpass the euro area's expected growth of 0.7% this year and 1.2% next year. The differing fortunes of these advanced economies can be attributed to variations in energy prices, pandemic-era stimulus, and the impact of higher interest rates.
Energy prices
Despite this, there are also underlying, long-term factors contributing to the divergence, giving the United States a competitive advantage. Nevertheless, it is widely anticipated that the US economy will experience a much slower growth rate in the last months of the year as pandemic savings decrease and borrowing costs remain at a 22-year high.
The disparity between the US and euro area economies has been primarily fueled by the significant increase in energy prices last year, as stated by OECD chief economist Clare Lombardelli in a recent press conference. In Europe, including the United Kingdom, inflation has been higher compared to the United States due to the region's status as a net energy importer. The UK and euro area economies were greatly impacted by the sharp rise in natural gas prices following Russia's full-scale invasion of Ukraine in February 2022, resulting in unprecedentedly high energy costs for households and businesses.
"Oil is a worldwide commodity, but natural gas has regional segmentation," explained Preston Caldwell, chief US economist for Morningstar Research Services. "While natural gas prices increased in the US, the increase was much more significant in Europe, resulting in various rationing measures. This significantly impacted output, and some of those effects still persist."
A natural gas pipeline in northeastern Germany. The country's extensive manufacturing industry has been severely impacted by the dramatic rise in energy prices due to the conflict in Ukraine. (Photo credit: Stefan Sauer/picture alliance/dpa/Getty Images)
Fiscal and monetary policy
Germany was significantly impacted by the energy shock due to its substantial manufacturing sector and heavy dependence on Russian gas. The output of Europe's largest economy experienced a slight contraction in the third quarter, leading many economists to anticipate a technical recession characterized by two consecutive quarters of declining output.
Both American and European officials implemented fiscal stimulus measures to soften the economic blow of Covid-19, but the United States did so on a much larger scale. The substantial government support, which included debt payment moratoriums, combined with changing spending habits and a "refinancing boom" due to historically low interest rates, helped to fill the pockets of Americans.
The savings amassed during the pandemic enabled American consumers to continue spending despite increasing prices, according to Carsten Brzeski, the global head of macroeconomic research at Dutch bank ING. This helped counteract the adverse effects of inflation on consumption, which is the main driver of the US economy.
However, there may be some drawbacks to this excessive spending.
Over the past few years, Americans have been dipping into their savings more than people in other countries, which could leave the United States at risk in the future, noted McFee from Oxford Economics. What's more, the United States has not yet experienced the full effects of higher interest rates. Compared to other countries, homeowners and businesses in the US don't have to refinance as often, meaning it takes longer for changes in monetary policy to impact the economy, explained McFee.
Chinas slowdown
It's unusual for the growth rate of the US economy to match that of China. The second-largest economy in the world had a strong start to the year after coming out of three years of Covid restrictions. However, the recovery faltered in the April-to-June quarter due to weak consumer spending, a continuing downturn in real estate, and subdued global demand for China's manufactured goods.
The country's economy seemed on the brink of stalling during the summer, as stated by Julian Evans-Pritchard, Chief China Economist at Capital Economics. However, he reported during an online briefing on Tuesday that there has been a recent improvement in momentum, with increased household confidence and accelerating retail sales.
On November 4, 2023, workers were seen at a construction site in Yantai, located in the eastern part of China's Shandong province. Analysts are predicting that the ongoing property downturn will continue to have a negative impact on China's growth prospects for the foreseeable future.
The increasing government spending to stimulate the economy will provide some momentum, but the ongoing decrease in the country's large property market and potential decrease in exports, which have been strong so far, will have a negative impact on growth, according to Evans-Pritchard.
By the end of next year, we anticipate a slowdown in the economy. This is evident in the concerning outlook for China's economy, as Moodys has placed the country on watch for a potential credit ratings downgrade. On Tuesday, they lowered the outlook on government debt from "stable" to "negative."
The ratings agency projects that China's annual growth rate will decrease to 4% in both 2024 and 2025, and will average 3.8% per year from 2026 to 2030. In contrast, the Chinese economy grew by an average of 7.7% per year in the decade prior to the pandemic, according to BlackRock.
Meanwhile, the IMF forecasts that India will expand by 6.3% this year and next, making it the world's fastest-growing major economy and an emerging challenger to its neighbor.
US growth to slow but AI boom looms
Although the US economys red-hot performance has defied expectations, economists think its unlikely to continue.
The economy is projected to experience a slight decrease in growth this quarter and into next year. Caldwell from Morningstar predicts annualized growth rates of under 1% in the second and third quarters, which is favored in the United States. He acknowledges that this is a low rate, but does not consider it to be negative or indicative of a recession. While he notes that a recession is possible, it is not his primary prediction.
Meanwhile, several top bank executives, such as Jane Fraser of Citigroup and Jamie Dimon of JPMorgan Chase, have cautioned that the US economy may soon face greater uncertainty.
However, looking ahead, the outlook appears more promising and could solidify America's position ahead of Europe in the years to come.
President Joe Biden's Inflation Reduction Act, aimed at directing $369 billion towards clean energy projects, has the potential to further attract investment to the United States, already known as a global capital-raising powerhouse.
The United States has seen cumulative venture capital investment in artificial intelligence reach nearly $450 billion over the past decade, surpassing AI investment in China by over double and exceeding that of the European Union and the United Kingdom by nearly 10 times, according to OECD data.
The United States has achieved significant productivity gains thanks to an abundance of innovative tech companies and rapid adoption of new technologies. According to Andrew Kenningham, chief Europe economist at Capital Economics, this has given the US a competitive edge compared to Europe and the UK. He also suggests that the US is well positioned to capitalize on advancements in AI, potentially widening the gap even further.
