Key Takeaways
- Growth Resilience: The US economy is projected to grow by 2% this year, rising to 2.2% next year, significantly outperforming Euro area markets.
- Productivity Gap: US labour productivity is expected to grow by 1.6% this year, compared to a modest 0.3%–0.7% in Australia.
- Flexible Labour Markets: A primary driver of US success is its highly flexible labour market, which allows for faster capital and talent reallocation.
- Deregulation Benefits: Strategic deregulation in the US continues to lower barriers for businesses, encouraging higher levels of private investment.
- Investment Flow: High global savings rates, particularly from slower-growing regions like Europe, are being funnelled into the US equity and bond markets.
Today I want to talk about the U.S. economy in comparison to other global economies and why it is performing the way it is. To understand the current US market outlook, I refer to the latest IMF reports and the monthly outlook from Standard and Poor’s, which is currently rated as a top-tier forecaster by the Congressional Budget Office.
For the US economy, both the IMF and Standard & Poor’s agree that growth this year should be 2%. Our own model, based on the Chicago Fed National Activity Indicator, also forecasts US growth of 2%. While a potential US shutdown could temporarily soften this to 1.7% or 1.8%, growth is expected to accelerate next year to 2.2%.
Global Economic Comparisons
When we look at growth in other areas, the contrast is stark. The Euro area remains sluggish, while Great Britain is now growing slightly faster than its neighbours at 1.3%. However, the Euro area is only expected to grow by 1.2% this year, drifting further to 1.1% next year.
Interestingly, these stagnant growth rates in Europe generate significant savings that need a home. These savings often flow directly into investing in US stocks, US bond markets, and the Australian stock market.
Meanwhile, China is slowing to 4.8% this year and 4.2% next year. Conversely, India continues its heroic march with 6.6% growth. For emerging markets in the Indo-Pacific, growth is proceeding at roughly 5.2% this year. The US remains a standout performer among developed nations, with steady growth and surprisingly managed inflation.
US Inflation vs Australian Conditions
There has been significant debate regarding the effect of tariffs on US inflation. Despite these challenges, US headline inflation remains stubbornly low, projected at only 2.8% this year. While core inflation is slightly higher at 3%, falling food and energy prices are providing a buffer. This raises a key question for our local economy: why can’t that happen here?
US Productivity vs Australia: The Widening Gap
A primary reason for steady growth and lower inflation in the States is the difference between US productivity vs Australia.
Earlier this year, Australia experienced a shocking slowdown in productivity growth. This was largely driven by a shift toward public sector hiring over private sector employment. It is well established that productivity in the market economy grows much faster than in the public sector.
Measuring Output per Hour
- Australia: In the first quarter, output per hour worked grew by just 0.3% per annum. The RBA expects this to eventually rise to 0.7%, matching the UK.
- United States: US labour productivity is expected to grow by 1.6% this year, potentially reaching 2.1% next year.
This means US labour productivity is growing a full 1% faster than the Australian economy. It is important to remember that growth in productivity is the engine that generates increases in living standards.
Why is the US More Productive?
There are two fundamental reasons why US productivity is outgrowing ours:
1. Flexible Labour Markets
The US possesses an extremely flexible labour market. This allows businesses to adapt quickly to new technologies and economic shifts. In contrast, recent policy changes in Australia have made our labour market less flexible than it was previously, hindering the ability of firms to optimise their workforce.
2. Strategic Deregulation
The ongoing program of deregulation in the US administration makes it easier for businesses to operate, innovate, and expand. This environment naturally encourages higher levels of business investment. This investment, in turn, creates a cycle of more growth and higher productivity.
The result is that living standards in the US are set to grow significantly faster than they are in Australia. For local investors, this highlights the importance of maintaining a diversified share portfolio that includes international exposure to capture these gains.
Navigating the differences between domestic and international markets requires a deep understanding of these underlying economic drivers. If you want to ensure your portfolio is positioned to benefit from the US productivity advantage, we can help.
Contact a Morgans adviser today to review your international strategy or find a local branch to start the conversation.
Frequently Asked Questions
Why is US productivity higher than Australia’s?
The primary drivers of higher US productivity vs Australia are a more flexible labour market and a stronger focus on deregulation. These factors allow US companies to reinvest and innovate more efficiently than Australian firms, which are currently facing a more rigid regulatory environment.
What is the current US market outlook?
The US market outlook remains positive with projected growth of 2.0% to 2.2% through 2026. While inflation remains a consideration, the strength of the US consumer and high labour productivity provide a solid foundation for continued economic expansion.
How does US productivity impact my investments?
High productivity often leads to higher corporate earnings and a stronger currency. This makes investing in US stocks an attractive option for Australians looking to benefit from a growth environment that is currently outpacing the domestic economy.
Why is the Euro area growing so slowly?
The Euro area is struggling with structural inefficiencies and lower productivity growth compared to the US. This "miserable" growth, as noted by Michael Knox, often results in excess savings being invested into higher-growth markets like the US and Australia.
What role does the public sector play in Australian productivity?
Productivity typically grows faster in the private "market" economy than in the public sector. Recent increases in public service hiring in Australia have contributed to a slowdown in overall output per hour worked compared to the private-sector-led growth seen in the US.
How can I get exposure to the US market?
Investors can gain exposure by buying and selling international shares through a full-service broker. This allows you to tap into the growth of highly productive US companies that are leading the global economy.
Is US inflation a threat to global markets?
While core inflation is around 3%, headline inflation is trending toward 2.5% in the coming years. This is considered manageable and is unlikely to cause a major market scare, especially as energy and food prices continue to stabilise in the US.
How do I start investing in international stocks?
The best first step is to speak with a Morgans adviser. They can help you navigate currency risks and select high-quality international assets that align with your long-term wealth management goals.
