America's Economic Resilience Amid Global Challenges

America's economy seems unfazed by the problems plaguing the world. Political turmoil and fiscal weaknesses are hitting other countries hard, but the US remains strong.

Recently, central banks in Canada, Sweden, and the eurozone cut interest rates. Yet, on June 12th, the Federal Reserve delayed plans for monetary loosening again. Despite higher rates and falling inflation, the Fed foresees just a slight cut this year.

America's stronger growth partly explains this divergence. Yet, what stands out is how little its markets are affected by political and fiscal issues. Elsewhere, these factors weigh heavily.

The European Central Bank projects 0.9% growth for the eurozone in 2024. Meanwhile, the Federal Reserve Bank of Atlanta estimates America's growth at over three times that rate. China faces a property crisis and deflation threats; Japan struggles with a weak currency, and Britain's productivity issues persist. Despite other economies catching up, America's share of global GDP is growing, thanks to strong growth and a strong dollar.

In other parts of the world, investors react strongly to political outcomes, especially where governments are fiscally weak. For instance, after President Macron announced surprise elections on June 9th, French bonds sold off, increasing the yield spread with German bunds. The IMF suggests France needs fiscal tightening of about 3% of GDP by 2029, but the National Rally party's plans involve significant new taxes and spending.

In Mexico, the peso fell 10% against the dollar following Claudia Sheinbaum's election victory. India’s markets dropped when Modi’s ability to enact reforms seemed weakened but later recovered. In Britain, the election doesn’t move investors much, mainly because the outcome seems certain, and politicians are cautious after the 2022 bond-market crisis.

Only America appears immune to political uncertainty and fiscal instability. Despite an underlying deficit of 7.4% of GDP, which requires significant fiscal tightening to stabilise, there is no risk premium on US government debt. This confidence persists even with the potential return of Donald Trump, which could lead to wider deficits and institutional challenges. America’s debt is seen as stable, supporting growth and interest rates, and strengthening the dollar. The stock market is booming again, driven by optimism about artificial intelligence.

Betting against America often seems like a losing strategy. However, this unique status is double-edged. The world’s reliance on American dynamism and the dollar means that any US political dysfunction or reckless fiscal policy could have widespread consequences. If America fell to populism, a budget crisis, and inflation, no other economy could provide the safe assets backed by a vast economy, deep capital markets, an open capital account, and the rule of law. America is the world's economic pillar, making it a potential vulnerability.


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