The U.S. economy’s global partners

With the presidential election and the Federal Reserve rate cut behind us, now is a good time to turn our attention to the rest of the world.

No economy is an island. This year’s U.S. growth owes a debt of thanks in part to our global partners, who we will need to continue playing a strong supporting role next year.

Unfortunately, the outlook for global economic growth has been described as “underwhelming” by the International Monetary Fund. And while economic growth, inflation, and employment are all on track domestically, a key ingredient—productivity—is missing both in the United States and abroad.

Global growth

The U.S. economy was a standout story in 2024, outperforming the rest of the world. In the third quarter, U.S. gross domestic product expanded by an estimated annualized 2.8 percent, a solid pace of growth that was driven by vigorous consumer spending, which was up 3.7 percent year over year.

In contrast to the U.S. performance, however, the 2025 outlook for global growth is “underwhelming”, according to the International Monetary Fund. The fund projects only 1.8 percent annualized growth for the world’s wealthiest economies next year and 4.2 percent growth for emerging economies. All told, global growth is expected to advance by 3.2 percent this year and next, according to the IMF.

To be sure, better forecasts might lie ahead. The 20 member countries of the eurozone exceeded expectations for slower growth in the third quarter, expanding their economies by an annualized 1.8 percent.

Global inflation and global debt

The IMF offers a bright picture for global inflation, projecting a decline to 4.3 percent in 2025 from 5.8 percent this year.  Both years show a significant decline from the 6.7 percent peak we saw in 2023.

Economists generally acknowledge that the rate of inflation is moving toward its low, pre-pandemic level. But years of loose fiscal policy and high levels of government debt in the United States and elsewhere could complicate the inflation fight.

Public debt is projected to exceed $100 trillion in 2024, and rise to 100 percent of global GDP by 2030, according to the IMF.  Rising debt levels could trigger another bout of rising global inflation if growth remains modest.

Global unemployment

Along with stable economic growth, most labor markers are healthier than they were before the pandemic.Labor force participation rates are at their highest since 2008, according to the OECD, which represents the world’s 38 largest economies.

More than a third of OECD countries are at record-high levels of employment; the group’s unemployment rate has been below 5 percent since 2022.

Last week, the eurozone reported its lowest unemployment rate in a decade. For the youngest workers, aged 15 to 29, unemployment was the lowest on record. However, another economic powerhouse, China, reported joblessness among youths and young adults at 17.6 percent in September after reaching a high of 18.8 percent in August.

My Take

The United States has made an impressive comeback over the last three years, one that owes no small thanks to a solid global backdrop. As measured by economic growth, inflation, and unemployment, the global economy should continue to play a strong supporting role in the U.S. economy.

There’s just one missing ingredient: Productivity. Labor market productivity is the magic ingredient that sustains faster growth and lower inflation. Absent “ambitious” investments in productivity, global growth is likely to fall below historical averages, the IMF has warned.

Even the world’s strongest economy should heed this warning. U.S. labor productivity grew by a moderate 2.2 percent in the third quarter, slightly less than economists had expected. Over the past four quarters, labor productivity, as measured by output per worker, has grown by an average of 2 percent, compared to an average of 3.4 percent in 2019, before the pandemic disruption of the labor market.

The importance of the global economy to U.S. growth shouldn’t be overlooked. But labor productivity will be required to sustain that growth, both here and abroad.

The week ahead

Wednesday: Markets will be watching the Consumer Price Index as they prepare a wide range of post-election inflation scenarios to assess future interest rate levels. Tuesday’s report from the Bureau of Labor Statistics could provide an important directional anchor.

Thursday: Initial jobless claims will provide a reality check to October’s loss of 28,000 private- sector jobs, as reported by the BLS. If initial claims stay in the 220,000 to 240,000 range that they’ve been in for much of this year, there will be hope that the most recent non-farm payroll report didn’t portend weakness ahead.

Friday: Inflation is the highlight of the week, but retail sales will be a very close second. Resilient consumers already have helped push the 2024 economy to near-peak performance, and continued strong spending heading into the holiday season would put us on track to close 2024 on strong economic footing.