It’s becoming clear that the surprising strength of the U.S. economy isn’t just a boon to domestic consumers, businesses and the political prospects of Joe Biden. It’s also just what the world needs as other wealthy nations struggle to sustain growth post-Covid. The last 24 hours has told a slowdown story across some of the world’s biggest and most developed markets. Japan lost its position as the third-largest economy and entered an unexpected recession as inflation hit spending. The U.K. also fell into recession, putting fresh political pressure on Prime Minister Rishi Sunak ahead of a tough election. EU officials slashed their forecast for growth and downplayed hopes for a quick recovery. As State Street senior macro strategist Noel Dixon wrote to clients this week, divergences among G10 countries are widening, particularly on growth and inflation. Most of the countries are growing below trend with the U.S. being the outlier, he said. The split, which wasn’t entirely unexpected, is posing a new question: What does the U.S. have going for it on the other side of the pandemic that its peers do not? “Is it about productivity growth? Is it about technology in the U.S.? We don’t know all the answers yet,” said the Atlantic Council’s Josh Lipsky, who previously served at the IMF and the State Department. “There’s something that appears structurally different in the U.S. economy than other peer advanced economies.” EY-Parthenon chief economist Gregory Daco attributes it to a few things. The exceptional vigor of the U.S. labor market accompanied by strong productivity. U.S. service-sector resilience. A reliance on fixed-rate debt that delays the effects of tighter monetary policy. And finally, stronger fiscal support than in other economies. He cites the CHIPS law and the Inflation Reduction Act, but also some Covid-era policies that are having a lingering effect. “We don’t typically see this type of economic divergence between the U.S., which remains the global growth engine that is doing relatively well, and the rest of the world, which is really lagging in terms of economic momentum,” Daco said. Institute of International Finance executive vice president Clay Lowery, a former top Treasury official, said the biggest driver is consumer spending driven by real wage growth. “What that implies is, there was a lot of excess savings coming out of Covid, and the U.S. consumer has basically drawn them down,” he said. “Whereas in other countries the consumer has not.” The divergence message is something that the Biden administration has been highlighting for months. The Treasury Department released a report in October comparing the U.S. recovery to other nations, arguing that “the progress we have made on growth, labor markets and inflation stands out across the globe.” NEC Director Lael Brainard told reporters Thursday that the trend in the U.S. “is perhaps the biggest contribution we can make to the global economy.” "Obviously, we want to see healthy growth around the globe,” she said. “We are actually seeing improvements in some emerging markets." It could all have geopolitical implications, in particular for the way the U.S. and China get along. “Has China sought to find more accommodation with the United States … because they need to find a way to have a better economic relationship with an economy that is strong and has grown faster than other economies, while their own economy has frankly not done so well?” Lowery said. There’s a risk that stagnation in other major economies could become a drag on the U.S. That’s where China’s growth story could also have an impact. “If the rest of the world is struggling, that is going to weigh on U.S. exports, on U.S. investments abroad, and will have a detrimental effect on growth in the U.S.,” Daco said. “Fortunately, the U.S. is a fairly closed, large economy, and so the passthrough is not as direct as if you were talking about a small, open economy. But it is noteworthy that this backdrop is likely to weigh on growth.” Lipsky compares the global economy to a kind of Jenga tower that could get wobbly. The U.S. and India are two of the strongest pieces. “You look at it from above and it looks sturdy,” he said. “But if you pan the camera down, there are some holes. You can only take so many of those at once before the whole structure is destabilized.” Happy Friday — Send thoughts and tips to zwarmbrodt@politico.com.
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