We studied how economies tackle financial inclusion to see how well they might cope in a downturn. We found 4 categories–and then there’s the U.S.

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A global inflation crisis combined with aggressive monetary tightening have turned the tide of an era of easy financial conditions. Investors are looking for signs beyond traditional capital market assumptions that indicate how resilient markets may be in the face of a significant economic downturn.

Financial inclusion may not seem like a priority input for investors mapping risks in the markets. Yet successive shocks, such as the impact of lockdowns, price pressures, energy supply restrictions, disruptions to education, and strained health systems, continue to lay bare the inequalities that underpin economies. global.

The World Bank defines financial inclusion as “individuals and businesses that have access to useful and affordable financial products and services that meet their needs (transactions, payments, savings, credit, and insurance) delivered in a responsible and sustainable manner.”

According to our researchThe extent to which governments, financial systems, and employers are investing in financial inclusion can act as a lens through which to analyze the future resilience, long-term productivity, and growth potential of a market.

We recently undertook research to create a global financial inclusion benchmark, comparing the results to indices that track markers of stable and successful societies. We find a clear correlation between the ranking of countries for financial inclusion and for indicators such as economic resilience, food security, living standards, and action on climate change. These relationships suggest how improving access to relevant financial tools, services, and advice could help markets move forward on concerns such as hunger, climate resilience, and improving overall health and well-being. In turn, these factors can be significant as an indicator of the resilience of economies to financial shocks.

Our analysis of financial inclusion across 42 different global markets indicates four distinct categories.

The first category is mature and forward-looking economies: wealthy countries exhibiting successful actions related to financial inclusion and other social factors in general, supporting long-term economic growth and resilience through the peaks and troughs of the cycle. economic.

Four Scandinavian markets (Sweden, Finland, Denmark, and Norway) rank in the top 10 for overall financial inclusion, according to our model. In fact, these types of markets represent relatively safe economic havens, even in the current market environment.

Europe’s largest and oldest economies comprise a second distinct category: mature and retrograde economies. In the UK, Germany and France, the effect of rising costs of living is tempered by the availability of government support packages and relatively high levels of family income. In the short term, these factors may be enough to protect these economies from the sharp turns of the current cycle.

However, the cracks in its long-term resilience are revealed by flaws in its financial inclusion. While these countries rank highly for the adequacy and sustainability of their public pension systems, their overall financial inclusion scores suffer from low scores on indicators such as the availability of government-provided financial education and the level of support that employers provide to their workforce, such as contributions to pensions.

This reliance on public pensions versus individual contributions means that as the aging population grows, so does the burden on the state. Over time, this becomes less sustainable without greater contributions from employers and workers.

By failing to engage their aging populations around the threats of inadequate retirement income, both at the employer and government levels, many of the continent’s largest markets could be facing a potential pension crisis. State safety nets mean that this risk is priceless today, but represents a serious long-term risk to economic health and resilience for decades to come.

In the same multi-decade perspective, a third category of young and forward-looking markets for financial inclusion have more attractive prospects for their long-term economic resilience. In newer economies, predominantly in Asia and Southeast Asia, financial literacy may be relatively low, but the middle class is growing rapidly. Governments, financial systems and employers are effectively collaborating and investing in forward-thinking initiatives.

These newer economies have vibrant governments and private sectors and have taken on the more financially inclusive aspects of other markets to shape their society. The richest among them (such as Singapore, which tops our ranking) can choose the infrastructure, regulation, and structure of their financial systems to match the growing wealth of their populations. Many of these economies are weathering the current market storm relatively well.

The fourth category comprises markets that to date have lacked the resources to invest in their financial and social systems, including those that promote financial inclusion. The predominantly developing markets in Latin America and sub-Saharan Africa are the least resilient to the impact of the global market cost-of-living crisis and the least able to prevent civil unrest resulting from food insecurity.

US financial inclusion scores defy categorization. For example, it achieves scores comparable to a mature, backward economy in terms of its government infrastructure, but performs more like a young, progressive economy in terms of technology adoption, employer support, and business philosophy.

However, there is strong evidence that women in the US feel much less supported by the financial system than men, citing concerns such as access to credit, which could be a limiting factor in terms of growth of assets. women-led businesses.

The US economy is already struggling with a lack of labor supply as several groups resist returning to the labor market, contributing to sharply rising price pressures. The last two years have revealed the vulnerabilities of the US labor market. Without additional support and encouragement for women workers, the current struggles with inflation and the labor market may spread.

A global recession leaves investors with difficult choices for the foreseeable future. Very few markets look attractive, but the level and underlying drivers of financial inclusion offer some clues about the long-term resilience of global economies.

Seema Shah is Chief Global Strategist at Principal Asset Management. This article is not intended to be investment advice.

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