News in Charts: G7 – no longer flying

Fathom Consulting has created a large database of economic and financial market charts, which provide unique insight into the global economy, including comparisons between countries. A selection of these is shown in the charts below and available on Refinitiv’s Datastream Chartbook, under ‘04. International Comparisons – G7’

The G7 group of economies is made up of large, rich democracies. These countries meet regularly to discuss and coordinate a combined response to pressing global issues such as the pandemic and climate change. As recently as 1999 their combined GDP made up 66% of the world total. However, their collective economic might has waned; now they account for 44% of world GDP (at market exchange rates), with the largest member, the USA, representing more than half of that total.

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The G7 group of economies has also seen its importance in world trade drop over the past couple of decades. G7 gross trade (goods and services) has declined from 46% of the world total to a figure of 33% in 2021, with the OECD forecasting a rough stabilisation over the next couple of years. The rise of the BRICS, and in particular, China, has been important. The BRICS share of world trade rose from 7% of the world total in 1999 to 18% last year. G7 countries have not all suffered from a ‘China shock’ to trade, with Germany just about holding onto its share of the world market during the years 1999 to 2021.

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The decline in the G7 economies’ share of world GDP and trade is unlikely to reverse anytime soon. The group faces structural headwinds that are likely to keep growth rates lower than the global average. All have high levels of debt, which Fathom Consulting has previously found works to reduce structural growth rates. An injection of credit can be used to buy additional growth in the short term, but it is not sustainable; and the more an economy relies on credit, the smaller the bang it gets for its buck. High debt levels are made worse by deteriorating demographics, which reduce structural growth rates due to the lower availability of labour. On both fronts, Japan is further down the road than the rest of the G7 and offers an idea of what may lie ahead.

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At the moment, each of the G7 economies is experiencing above-target levels of inflation, with the sole exception of Japan. Price pressures are greatest in the US but are higher across the board, as economies adjust to very strong demand against a backdrop of pandemic-related distortions in supply and high commodities prices. There remains a large degree of uncertainty about how long this cyclical bout of inflation will last — this will depend to a large degree on how well central banks are able to maintain well-anchored inflation expectations. Nonetheless, there remains a risk that central banks —and in particular, the Federal Reserve — will increase their policy rates to levels over and above what is currently priced in by financial markets.

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While the outlook for short-term interest rates remains highly uncertain, there is more reason to believe that long-term interest rates will remain historically low. These tend to reflect slower-moving factors such as potential growth rates and levels of debt within an economy. Since these only adjust gradually over time, it is likely that the low level of long-term interest rates that prevailed pre-pandemic has not been significantly shifted by what has been an unusual economic cycle. Investors are pricing such an outcome, with G7 yield curves pointing to long-term interest rates in the range 0.5% to 2.5% — reflective of Japanification across the board, consistent with low inflation and low growth rates expected in steady state.

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