Despite global inflation, the US economic recovery is among the strongest of the G-7 countries | Bot To News


Economic uncertainty is troubling most countries today. Large, persistent headwinds threaten global economies, and the severity of these impacts is increasing. With Russia’s war in Ukraine, the ongoing economic fallout stemming from the COVID-19 pandemic, climate-related disruptions, and central banks’ decisions to rapidly raise interest rates, another global economic downturn is looking increasingly likely. Despite these global challenges, however, the US economy remains strong with a tight labor market, historically low unemployment and a growing economy.

During and after the COVID-19 recession, fiscal support such as the 2021 stimulus package and the historic federal vaccination program helped steer the U.S. economy toward an unprecedented recovery, averting a double-dip recession, higher poverty rates, and the effects of longer periods of unemployment. At the initiative of President Joe Biden, Congress passed an industrial strategy—in the form of the Infrastructure Investments and Jobs Act, the CHIPS and Science Act, and the Inflation Reduction Act—to help put the economy on a path to resilience and independence. Despite the headwinds, the evidence suggests that the United States has a stronger economic outlook than many other leading industrial nations—some of which have already experienced contraction or economic decline.

This article highlights seven indicators—inflation, energy prices, gross domestic product (GDP), unemployment rate, long-term unemployment, 2023 GDP forecast, and 2023 unemployment rate forecast—that compare the state of the economic recovery in the United States. and its outlook for 2023 with that of its Group of Seven (G-7) colleagues.

What is the G-7?

Canada, France, Germany, Italy, Japan, the United Kingdom and the United States make up the G-7 – an informal gathering of some of the world’s largest advanced economies. The European Union is an undocumented member. Together, the G-7 accounts for nearly half of global economic activity.

Inflation is a global problem

In nearly all developed economies, inflation is currently higher than historical averages, putting pressure on individuals, businesses and the stability of economies. Simply put, the US is far from the only country struggling with rising prices. Inflation is a problem in all individual G-7 countries, but it has the strongest impact in Germany, Italy and the United Kingdom, where inflation is at or near double digits. (see Figure 1) Inflation is even higher than usual in Japan, which has experienced more than two decades of deflation.

Figure 1

While inflation emerged as a problem in the United States earlier than in other G-7 countries, current inflation in each member state is primarily related to insufficient supply to meet demand. Globally, Russian President Vladimir Putin’s war in Ukraine is increasing pressure on energy and food prices; ongoing problems in the supply chain create bottlenecks for certain goods; and the consequences of the pandemic continue to cause rising prices. Energy costs are particularly rising in the UK, Italy and Germany, which is not surprising given their heavy dependence on Russian fuel supplies. (see Figure 2)

Figure 2

How the Biden Administration’s Industrial Strategy Meets Right Now

The current global inflationary crisis is a reminder of the pitfalls of over-reliance on global supply chains and highlights the need to increase domestic supply, especially of critical goods. To respond to this need, the Biden administration’s industrial strategy will reduce consumer spending and create good new jobs through supply-side investment, ultimately building a more resilient economy.

For example, the Inflation Reduction Act includes historic investments in clean energy that will expand domestic production and help relieve supply chain bottlenecks, moving the United States toward a 100 percent clean energy future. To achieve this goal, many companies have announced new efforts for domestic production since the passage of the law in August, which will also create jobs at home in the future. The CHIPS and Science Act similarly encourages domestic manufacturing and research and development. Specifically, by revitalizing domestic semiconductor manufacturing capabilities, the CHIPS and Science Act will move the United States toward supply-side resilience for a critical input. Combined, these efforts will help the United States better absorb future economic shocks.

The US economy has recovered faster than its global counterparts

Although most leading economies are facing inflation, the US economy remains strong. While the COVID-19 pandemic has caused unprecedented economic disruption in leading economies, the US economy has recovered much faster than any other in the G-7; by the third quarter of 2021, the country had recovered all of the real GDP — a measure of economic activity — lost since the start of the pandemic recession. (picture 3)

Figure 3

By contrast, some economies, such as the UK, are operating below pre-recession levels, making the prospect of another downturn – one already predicted by the Bank of England – extremely worrying. The strong recovery in the United States was not predetermined, but the result of deliberate policy decisions. Strong fiscal support passed by Congress, including the expansion of unemployment insurance and improvements to the child tax credit, helped the United States avoid a prolonged economic downturn.

The recovery of the labor market in the USA was also strong

The US labor market’s recovery from the depths of the COVID-19 pandemic has been historic. In just over two years, the economy has recovered all the jobs lost during the recession, and the unemployment rate remains near 50-year lows – and lower than many G-7 countries, including neighboring Canada. (see Figure 4) In places like the UK, the implementation of various labor market policies meant that unemployment rates did not rise as much as in the United States during the COVID-19 recession. That makes the recovery in the U.S. unemployment rate all the more remarkable—underscoring the importance of pandemic relief measures and an expanded social safety net.

Figure 4

Long-term unemployment is lower in the US than in most other G-7 countries

Although the labor force share in the United States has not yet fully recovered, long-term unemployment, while unacceptably high, is much lower than in almost all other G-7 countries. (see figure 5) This is crucial, as sustained long-term unemployment can separate workers from the workforce and make it difficult for them to re-enter. Ensuring that workers can maintain their connection to the workforce and avoid losing skills is essential to a successful recovery. In the United States, the Biden administration’s fiscal support has been critical to preventing scarring, particularly by ensuring that young workers, low-wage workers, and black workers — who particularly struggled during and after the Great Recession — experienced strong wage growth.

Figure 5

Learn more about the US job recovery after the COVID-19 recession

Despite global headwinds, the US economic outlook for 2023 remains promising

Despite the great uncertainty, the economic outlook for 2023 is more promising for the US than for most other G-7 members. Central banks in Canada, England and the European Union are forecasting lower real GDP and higher unemployment rates – and for longer periods of time – than the Federal Reserve. International Monetary Fund projections look equally favorable, predicting that the United States will have higher growth in 2023 than all G-7 countries except Japan (see Figure 6) and lower unemployment than most G-7 countries. (see Figure 7) Of course, real GDP growth is expected to be much lower than usual in the G-7 due to global headwinds such as inflation and Russia’s war in Ukraine.

Figure 6

Conclusion

Economic uncertainty continues to affect every developed economy, as inflation, coupled with the prospect of a central bank-induced recession, threatens to undo progress in economic recovery. However, the US enters this period from a very strong position. While there are many downside risks that could emerge, legislative victories over the past two years have helped reinforce a strong economic foundation and lay the groundwork for future economic resilience.



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