The U.S. economy continues to outpace the economies of the G7. Coming up, we tell you why.
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From Thrivent Asset Management, welcome to Advisor’s Market360. A podcast for you, the driven financial advisor.
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When it comes to the U.S. economy, it’s easy to find a lot of negatives: there’s still the possibility of recession, inflation has proven to be “sticky” and stocks have been volatile. But could it be worse? If we look at our G7 peers, the answer is “yes.”
By many metrics, the U.S. is ahead of these economies in terms of pandemic recovery. This is seen in the rebound in employment and the current rate of inflation. The growth of our gross domestic product, or GDP, has been very strong as well, trailing just behind Canada in this regard. In all, it’s remarkable that the U.S. is so strong in all of these key economic metrics.
So it shouldn’t come as a surprise that many investment portfolios have a much higher percentage of U.S. equities than international holdings. But are the economic metrics mentioned previously the only reason why? Keep listening as we dig deeper on the differences between the U.S. and the G7 and whether there’s an investment opportunity to be found in international markets.
But before we go much further, let’s do a quick refresher on the G7, which is short for the Group of Seven. This is an intergovernmental organization consisting of seven major advanced economies. The leaders of each meet annually to discuss and coordinate various economic, financial, and political matters. Along with the United States, the other G7 member countries are Canada, France, Germany, Italy, Japan, and the United Kingdom. The European Union is also represented at G7 meetings but is not considered a formal member.
It's important to note that the economic cycles of G7 countries are interconnected, and global economic events can have a profound impact on their individual economic performances. Additionally, the COVID-19 pandemic had a substantial and synchronized impact on the economies of the G7 nations in 2020, leading to significant contractions followed by various degrees of recovery in the subsequent years.
As mentioned at the top of the episode, there are three metrics we’ve looked at to compare the strength of G7 economies: cumulative growth of GDP, reduction in the rate of inflation, and reduction in the rate of unemployment. Let’s break those down.
Let’s start with GDP. The U.S. GDP has grown cumulatively over the three-year period ending September 30th by nearly 24 and a half percent. For a time, the U.S. was ahead of its peers, but very recently Canada pulled ahead in this metric with 27 and a half percent. The average GDP growth of the G7 countries is 18.7 percent – the European constituents fall fairly close to this average. Japan, on the other hand, has a cumulative GDP growth of just 5.2 percent over the past three years.
As for inflation, the U.S. comes out on top at a 5.4 percent reduction in the inflation rate over the three year period ending August 31. Inflation is a mixed bag for our G7 peers. Germany closely trails the U.S. at 5.2 percent, the UK and Canada both fall between 4 and 4 and a half percent, and France, Italy and Japan all come in under 2 percent – once again, for the three-year period ending August 31.
Onto the labor market. A nuance worth mentioning is that different countries release their employment metrics at different times. Regardless, it’s safe to say that the U.S. is far ahead in the reduction in the unemployment rate. Here we saw a nearly 11 percent reduction in the last three years ending September 30, far ahead of most of the G7 countries. Granted, we saw the highest unemployment level, but the quick recovery is noteworthy. Canada came in second place with a little under 8 percent reduction in unemployment as of the same date. Timing differences aside, it’s safe to say that each of the other G7 constituents fell below 3 percent for this metric in the last three years.
Clearly, there are things that set the U.S. apart from its G7 counterparts. What might they be? Here are four reasons why the U.S. economy is different by nature.
Reason one is GDP. The U.S. has had the highest nominal GDP in the world for nearly three decades. And the U.S. economy accounts for almost a quarter of global GDP. This is reflected in our outsized influence on the global economy. While past performance does not guarantee future results, the GDP of the U.S. does tend to inspire confidence.
Reason two: the U.S. is an innovation powerhouse. This is seen at both ends of the market cap spectrum. On one end are the small, entrepreneurial companies that can easily adapt to shifting markets and innovate by quickly adopting new technology. On the other end are the mega cap tech giants who are innovation powerhouses, creating and perfecting new technologies. This partly explains why the U.S. spent $680 billion in research and development in 2022. Contrast that with the $502 billion spent by all the other members of the G7—combined.
Reason three: the U.S. has diversity and resiliency in its economy and benefits from a wide range of industries, including technology, finance, healthcare, manufacturing, and more. This diversity plays a large role in driving economic growth. It also has a stabilizing effect on the overall market. Because as is often the case, when one sector is in decline, another is in growth mode. Diversity helps ensure that ups and downs counteract each other.
And reason four: partially due to its size and geography, the U.S. is not overly reliant on other countries, whereas other G7 members look to the U.S. and other countries to meet their needs. Not to mention, the U.S. has a demographic advantage due to its growing population.
As we look at the differences between the U.S. and its G7 peers, another thing to consider is the strong U.S. response to the COVID-19 pandemic. The fiscal and monetary policy deployed in the U.S. was aggressive and supported the economy during the pandemic. This included stimulus packages, low interest rates and quantitative easing by the Federal Reserve, or Fed.
The effect of this swift action led to an increase in savings during the pandemic. And despite inflation, U.S. consumers for much of this year spent more than anticipated—partially in response to pent up demand. In fact, according to a recent survey of consumer finances published by the Federal Reserve, consumer spending this year has been substantial enough to deplete the savings accrued during the pandemic.
In terms of stimulus during the pandemic, the U.S. spent of a quarter of its GDP in its discretionary fiscal response. This was the highest percentage among G7 members.
Two additional things to remember about the U.S. economy during the pandemic: the mega-cap titans helped keep the market afloat and the strong U.S. dollar provided stability at home and abroad.
If we look at the pandemic response from the other G7 nations, its important to remember that these countries have a different set of concerns and conditions and need to respond to events in different ways. For example, the war in Ukraine has forced some members to provide significant financial and military support which has slowed post-pandemic recovery. Many G7 nations are also dealing with persistent inflation.
Looking at the longer-term prospects for recovery in these countries, another factor is decreasing population due to low fertility in both Italy and Japan. And when a lack of sector diversification is factored in, it seems likely that recovery from the pandemic will be a slower, on-going process.
With the contrast between the U.S. economy and G7 economies in mind, what does this mean from an investment perspective?
First, investors have many reasons to be confident in allocating their investments in the U.S. But this doesn’t mean that it’s time to go “all in” on U.S. investments.
International investments in G7 and other developed and emerging markets still have a place in a well-balanced portfolio. Diversification is always important — should the U.S. face unique challenges in the future, international investments will become more important. Also, other countries have the potential for growth and offer exposure to different economic conditions. And right now, many international investments are discounted compared to domestic investments.
Remember, while there are potential benefits to investing in G7 and emerging markets, there are also risks, including political risk, currency risk, and market risk. It’s important to thoroughly research any investment.
As always, remember that diversification is still important and it’s vital to keep an eye on client portfolios with a long-term view.
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We hope this episode gave you some new global insights. More episodes of Advisor’s Market360 are available wherever you listen to podcasts. Email us at podcast at thrivent funds dot com with your feedback, questions and topic suggestions for future episodes. And as always, you can learn more about us at thrivent funds dot com and find other insights of interest to you, the driven financial advisor. Bye for now.
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All information and representations herein are as of October 12, 2023, unless otherwise noted.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
Past performance is not necessarily indicative of future results.
Thrivent Asset Management, a division of Thrivent, offers financial professionals a variety of investment products to help meet their clients’ needs. Thrivent Distributors, LLC is a member of FINRA and SIPC and a subsidiary of Thrivent, the marketing name for Thrivent Financial for Lutherans.