Let’s add the monetary politics to the list of ways the American economy stands out. The central banks of Canada, Sweden and the euro zone They recently started cutting interest rates. However, on June 12 the Federal Reserve once again postponed its monetary flexibility plans. Although the rates in USA have increased more than in other large rich countries and inflation is falling, the average responsible for the Fed expects a cut of only a quarter of a percentage point this year. Some monetary divergence is the natural consequence of stronger growth in USA. But what is increasingly surprising about the relative vigor of USA is how immune he seems to be to threat of political dysfunction and fiscal fragilityfactors that weigh heavily on the rest of the world.
According to the latest projections of the European Central Bankthe economy of the euro zone will grow by 0.9% in 2024. A real-time estimate of the Federal Reserve Bank of Atlanta suggests that the economics of USA It is currently growing at more than three times that rate. China is battling a housing crisis and the threat of deflation; Japan has been defending its weak currency and Britain has become synonymous with terrible productivity. A combination of strong growth and a strong dollar means that the share of USA in global GDP at market exchange rates, which should fall as others approach the world’s largest economy, is instead growing.
Elsewhere, investors are spooked by election results, especially where governments are fiscally fragile. After the president Emmanuel Macron announced surprise parliamentary elections on June 9, French bonds sold, widening the differential between their yields and those of safe German bonds. He IMF consider that France needs a fiscal adjustment of around 3% of GDP to stabilize its debt by 2029. However, the growing National Group was fought in the last parliamentary elections with new tax and spending proposals worth perhaps €100 billion (3.6% of GDP) a year.
In Mexicothe peso has fallen about 10% against the dollar since the landslide victory of Claudia Sheinbaumthe candidate left-wing presidential, in their elections. The markets of India plummeted after it appeared that the capacity of Narendra Modi to implement reforms had weakened, although they have since largely recovered. The British election is not moving investors much, but only because the result is practically known and its politicians have been intimidated by the bond market crisis that occurred in 2022.
Only USA seems able to ignore political uncertainty and fiscal fragility. His underlying deficit of 7.4% of GDP means that the necessary fiscal adjustment to stabilize its debts is greater than that of France, even after taking into account faster growth. The probable return of donald trump to the White House creates the risk of wider deficits, institutional decay and perhaps even the politicization of monetary policy. However, there is no risk premium on the public debt of USAas if inflation were permanently defeated and the politics of Federal Reserve turned out exactly as predicted (even though this has not been the case in the past). In most countries, large deficits are a threat. In USA are taken simply to support growth and interest rates, making the dollar strengthens. The stock market is booming again, fueled by optimism about artificial intelligence.
bet against USA It may seem like a sure way to lose money. However, the unique status of Uncle Sam It has a double edge. The more the world depends on American dynamism and faith in the dollar, the greater the damage that Washington’s political dysfunction and reckless fiscal policy could eventually inflict. Yeah USA If it succumbed to populism, a budget crisis and inflation, the world would discover that no other economy was capable of providing safe assets backed by a vast economy, deep capital markets, an open capital account and the rule of law. USA It is the only bastion of the world economy. Interestingly, that creates a particular vulnerability.
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