Explore what global financial inclusion data could mean for the global economy.
From a big picture perspective, there are four emerging trends in 2023 Global Financial Inclusion Index data that could have interesting knock-on effects for certain global economies.
1. The proportion of the U.S. population that reports feeling financially included has dropped markedly, reflecting a rebalancing of the labor market.
The U.S. fell only marginally in the 2023 Index and remains in the top five markets overall. Yet our companion survey of 1,000 U.S. household decision-makers shows the proportion of people who feel they are financially included has fallen 12 percentage points, from 85% in 2022 to 73% in 2023.
It’s worth taking a moment to assess this disparity—and a deeper analysis of the data suggests that the actions and intentions of employers may tell part of the story.
The overall decline of the U.S. in the Index is driven by a fall in support from the employer pillar, with declines in the scores and rankings of all the indicators tracked. One possible explanation of such movement could be that U.S. employers are making changes now in anticipation of and to prepare for leaner times in the future.
Against the macroeconomic backdrop, this makes sense. While the U.S. economy has fared better this year than many had expected, elevated interest rates, still-sticky inflation, and lingering risks of economic slowdown may be leading to increased caution among businesses.
In an economic downturn, many companies first look to cut temporary or contract help, and costs overall, to help guard against job losses. This may explain some of the declines in the Index across indicators such as pension contributions and insurance benefits. It’s important to keep in mind that leader sentiment and specific behaviors are likely to vary across industries. In fact, despite the macroeconomic backdrop in the U.S., certain proprietary research conducted by Principal® has indicated pockets of cautious optimism from business leaders in specific business segments and geographic regions.
Businesses taking actions to reduce benefits suggests we are in the middle of a labor market rebalancing. One of the most discussed topics at the beginning of the year was wage growth, as employees were able to dictate pay in a tight labor market.
However, as labor markets loosen, the balance of negotiating power often swings from employee to employer.
Take recent strike action in the U.S. as an example. The direct action seen in recent months is likely a symptom of real wages declining during the past few years, placing very real financial pressures on employees.
However, as the balance of negotiating power shifts back to the employer, strike action is likely to be less effective. Unfortunately, this feeling of financial exclusion may persist until the economy improves and the labor market rebalancing comes to a close.
Potential implication: The buildup of overall negative sentiment we see in the survey data and an increase in people reporting feeling financially excluded could be read as a lead indicator of what might begin to appear in the hard economic data over time (e.g., a decline in wage growth, consumer spending, and overall confidence).
U.S. performance in the overall Index and consumer survey
| U.S. rankings year over year | 2023 | 2022 | YoY change |
|---|---|---|---|
| Overall ranking | 4 | 2 | -2 |
| Employer support ranking | 12 | 2 | -10 |
| Provision of guidance and support around financial issues | 26 | 6 | -20 |
| Employee pension contributions | 4 | 1 | -3 |
| Employee insurance schemes | 8 | 5 | -3 |
| Employer pay initiatives | 21 | 4 | -17 |
| Percentage of U.S. consumers who feel financially included | 73% | 85% | -12% points |
2. Over the long term, will the Asian economy become increasingly less reliant on China?
Our data suggests that Asia (and particularly Southeast Asian economies such as Thailand, Malaysia, and Vietnam) is making rapid advancements in financial inclusion and is at a stage in economic development whereby the banks—and the new fintech entrants—are enabling a far greater proportion of the population to be part of the financial system.
Alongside greater availability of banking services, credit, and access to capital comes the potential to build a more entrepreneurial economy. And, over time, changes such as increases in infrastructure spending and the implementation of more sophisticated government policies, combined with more sophisticated savings behavior, may further strengthen the investment case for these markets for international investors, exclusive of the outlook for China.
Given the burst of economic activity this region experienced after pandemic lockdowns lifted, combined with current U.S./China tensions, foreign direct investment (FDI) is increasing significantly in Southeast Asia. FDI into China increased by 5% between 2021 and 2022, 8% into Singapore, 39% into Malaysia, and 14% into Vietnam. China’s FDI of $189 billion in 2022 is only slightly above that of Singapore, Malaysia, and Vietnam combined ($176 billion).
However, it’s important to note that while markets across Southeast Asia registered an uptick in financial inclusion over the past year, they also struggled economically given weak demand for goods exports and political uncertainty.
Potential implication: Our analysis shows that financial inclusion is tightly correlated to economic resilience, human development, and productivity.
If these developing economies in Southeast Asia continue along such a path, they are likely not only to see a boost to productive investment and consumption but could also be better positioned to manage risks and sustain future financial shocks. While they are certainly not immune to China’s situation, the data suggests financial inclusion is one of many indicators for which the younger Southeast Asian economies may become less acutely reliant on China over a multi-decade view.
3. Europe’s reliance on China appears entrenched.
Europe’s large economies are generally stagnating or moving backward in terms of financial inclusion. Germany fell seven places and its score dropped by 8.6 points year over year. France, the Netherlands, and Spain also saw declines, while Italy improved marginally but still ranks 37th.
One interpretation of these results is that slowing growth and weakness in China are taking a toll globally. The corresponding sluggish economic growth across Europe over the last year shows the dominant impact of China on the continent’s economies—in particular, Germany.
The drop in financial inclusion mirrors a disappointing drop in economic output (the economy in the second quarter of this year showed little sign of recovery from a winter recession), renewing the use of the term Eurosclerosis.
Unlike Southeast Asia’s financial system, which appears to be rapidly evolving and supporting a tech-enabled economy, Germany is the prime example of Eurosclerosis—an old-world economy predicated on traditional manufacturing industries and trade with inflexible market conditions.
Potential implication: European financial systems appear to be plateauing and failing to inspire greater confidence in businesses or encourage entrepreneurialism. This implies it will be difficult for a given market to gradually decrease its reliance on Chinese consumption. Global investors may be more inclined to give Europe a wider berth if they feel it’s failing to decouple its economic prospects from China.
Europe’s large economies’ financial inclusion performance
| Financial support system | Enabler of SME growth and success | Enabler of general business confidence | Volume of real-time transactions | |||||
|---|---|---|---|---|---|---|---|---|
| Market | 2023 rank | YoY change | 2023 rank | YoY change | 2023 rank | YoY change | 2023 rank | YoY change |
| France | 30 | -3 | 36 | -10 | 35 | +1 | 34 | -13 |
| Germany | 23 | -10 | 25 | +9 | 34 | -2 | 25 | -8 |
4. Major Latin American economies demonstrate 2 key macro drivers of financial inclusion.
Falling inflation
Brazil (jointly with South Korea) was the biggest riser in the overall rankings of the Index this year, mainly thanks to significant jumps in financial system and government support. Much of this is owed to its rapid adoption of fintech. But it’s also partially attributable to greater political stability and falling inflation. Although the Consumer Price Index has picked up slightly over the summer, Brazil’s headline inflation rate remains well below the highs seen back in October 2022.
Lower inflation is due to the Brazilian central bank’s policies, but its success, in our view, gets largely attributed to the government from a public perspective. Although not directly related to inflation, it’s notable that the percentage of people in Brazil who feel the government acts in a way that makes them feel financially included increased by seven percentage points year over year from 43% to 55%.
Reshoring
The Index data on Mexico illustrates a second macro driver of financial inclusion. Mexico rose one place, and its overall score improved by 4.1 points. This was driven by increases in the government support pillar (rank up six places; score up 14.8 points) and employer support pillar (rank up one place; score up 5.9 points).
An underlying macro driver behind these improvements is the government-driven push to reshore business. The government is proactively developing the nearshoring narrative, seeking to strengthen the economy by making Mexico a more attractive place to do business for domestic and international corporates and, as a knock-on effect, companies can promote greater financial inclusion through better pay and benefits packages.
Potential implication: During a global slowdown fueled by China's economic slump, different markets are exhibiting varying drivers of growth. For some, these drivers are the development of their financial system and an increasingly banked and connected community. For others, these are a recalibration of government policies designed to propel growth and boost domestic productivity.
These trends are particularly prevalent in emerging markets. The headwinds that plagued emerging markets for most of 2021 and 2022 have now broadly become tailwinds—thanks primarily to swift central bank action that has allowed emerging markets to reach peak inflation and begin leveling off rates faster than developed markets. From an investment perspective, these trends illustrate the importance of a granular approach. Against this macro backdrop, active asset allocation is critical.
What's next?
Dig into the data and read the full report at the Global Financial Inclusion Index site.
