The Dangers of Relying on the US to Power the Global Economy

In the US, jobs are plentiful, and consumers are confident and spending. Stocks reached a record in February, and the dollar is strong. The economy last year expanded by more than the size of the Spanish or Indonesian economy, ending 2023 with the fastest gains in back-to-back quarters since 2021. But relying on the US to power world growth poses risks for other nations, as well as the US itself.

China remains bogged down by a real estate slump, and foreign investors have fled the nation amid a stock market rout that’s erased $7 trillion since a peak in early 2021. Prices have fallen for three consecutive quarters, the longest deflationary streak since the Asian financial crisis in the late 1990s. In Europe, the UK slipped into a mild recession in the second half of 2023, and Germany is in danger of contracting again in 2024, dragging on the rest of the euro zone. Japan unexpectedly fell into a recession last year. “The US economy will continue to outshine economies in much of the rest of the world this year, particularly in China and Europe,” says Mark Zandi, chief economist for Moody’s Analytics.

The strength of the US has been enough to offset a deeper global slowdown and was in part what led the International Monetary Fund on Jan. 30 to raise its forecast for world economic growth this year to 3.1%, from 2.9% in October.

Reducing inflation in the US remains a stop-and-go process. Consumer prices jumped at the start of the year, stalling recent disinflation progress and disappointing investors who were hoping the Federal Reserve would begin cutting rates soon. Higher US interest rates help keep borrowing costs elevated around the world. That’s a particular problem for emerging economies that have borrowed in dollars. Hopes for early interest-rate cuts by the Fed had cleared the way for emerging-economy central banks to start bringing borrowing costs down. For example, Latin American domestic debt began the year with its best rally since 2009, spurred by rate cuts in Chile and Brazil.

The robust US economy also supports a strong dollar. A Bloomberg gauge of dollar strength is up about 11% since the end of 2020, even given a slight decline last year. The dollar’s 2.6% gain in 2024 is the best start to a year since 2015. Analysis last year by the IMF found that a 10% dollar appreciation reduces emerging-economy growth by 1.9% after one year and harms trade, credit availability and stock market performance.

Continued US economic strength isn’t a given, and some weakness is already evident. Small-business optimism last month suffered the biggest drop in more than a year, hurt by deteriorating profits and diminishing sales expectations, according to the National Federation of Independent Business. Americans are also carrying bigger credit card balances, which are weighing on lower-income households especially. The average rate on credit card accounts with assessed interest was 22.75%, around the highest in Fed data back to 1995, while the average rate on 60‑month car loans was the highest in figures back to 2006. “Credit conditions have tightened notably, and credit demand indicators are weak,” says Citigroup Inc. senior global economist Robert Sockin.

Another threat is China and Europe weakening further, exposing the US to a shock that would leave the world without a growth leader. On Feb. 14, Federal Reserve Bank of Chicago President Austan Goolsbee warned against complacency about how a deeper global slowdown or a geopolitical shock would affect the US. America’s economy isn’t purely domestically driven, he said, warning that further weakness in the world’s other big economies could have a big impact in the US. “The freakout business confidence and investment channel is real,” Goolsbee said at a Council on Foreign Relations event. “We would probably want to look at more than just the trade impact. We’d want to look at the investment impact.”

For now, though, the US appears set to continue as the world economy’s outperformer. “The short-term outlook for the euro-area economy points to stagnation in the face of tighter financing conditions, weak business and consumer confidence, and low foreign demand,” Gabriel Makhlouf, member of the European Central Bank Governing Council, said on Feb. 14.

Put another way, sentiment in China and Europe remains weak, according to Freya Beamish, chief economist at TS Lombard. “Animal spirits are stretched in Europe—and for other reasons in China—while the US still has some road to run on this front,” she says.

Excess savings that accumulated in the US during the pandemic—and, more recently, a boost to households from receding inflation—mean improved purchasing power is keeping the US chugging along. Expectations for lower interest rates in 2024 as the Fed responds to the moderation in inflationary pressures are one reason many forecasters no longer see economic growth dipping below its trend rate of around 2% this year. Economists at Deutsche Bank AG, for example, announced on Feb. 5 that, rather than a recession, they see a 1.9% expansion in gross domestic product.

In a slightly less dramatic shift, S&P Global Market Intelligence on Feb. 6 upgraded its forecast for 2024 GDP growth to 2.4%, from 1.7%. All of which shows that the US has momentum this year, a point Fed Chair Jerome Powell alluded to in his press conference on Jan. 31. “Let’s be honest,” he said. “This is a good economy.”