Countries of the G7 remain secure against most foreseeable risks, although distinct challenges still face each country, according to a new report from Standard & Poor’s Ratings Services.

The research focuses on the five top-rated G7 countries (not including Japan and Italy). “The U.S., the U.K., and Canada are better positioned than France or Germany to achieve strong growth due to their more flexible and mobile labor forces, lower tax burdens, and greater freedom in coordinating monetary and economic policy,” said Standard & Poor’s credit analyst Philippe Sachs.

The report contrasts the different fiscal performances of the five governments. Canada is the only one projected to achieve a general government surplus in 2005. The fiscal positions of both the U.S. and U.K. have deteriorated during recent years, while Germany and France have limited flexibility to improve their structural budget balances because high tax burdens make it difficult to raise additional revenues, and expenditure is dominated by transfers and wages, which are hard to cut. It also notes that the U.K. and Canadian economies grew continuously throughout the global downturn that began in 2001, while many other major economies experienced recession. The two countries are experiencing a period of sustained low inflation and enjoy the lowest unemployment rates among the G7, S&P says.

Canada and the U.K. also have significantly lower government debt to GDP burdens than the U.S., France, and Germany, reflecting sounder growth and fiscal balances in recent years.

With labor force growth moderating (or even declining, in Germany), productivity growth will be a decisive factor determining future economic expansion. Among the five ‘AAA’ rated G7 countries, the absolute level of labor productivity per hour worked in 2003 was highest in France, at 106% of the level in the U.S.; the lowest was the U.K. at 77%. The growth of labor productivity has increased more rapidly in the U.S. and the U.K., than in Eurozone peers and Canada. The same is true for total factor productivity.

The banking sectors in all five countries, with some caveats regarding Germany, are sound and are not pressing concerns, the rating agency says. Germany’s banking system remains hampered by a fragile operating environment and low levels of profitability.

The report also highlights the weak external position of the U.S. “We project that the external debt of the U.S. net of liquid assets will reach 365% of current account receipts in 2005, one of the highest ratios of all 105 sovereigns rated by Standard & Poor’s,” Sachs explained. “Although this high reliance upon foreign savings can be partly explained by stronger growth prospects in the U.S. and better prospective investment returns, it is also partly explained by a fiscal position that has weakened over the past four years. The risks of these external imbalances are borne by creditors and the debtor alike. In this regard, both U.S. presidential candidates’ plans to reduce the federal deficit, if enacted, should help to attenuate these risks,” he concluded.

The outlooks on all five countries are stable. All five countries are recording faster GDP growth in 2004, although the differing levels of policy and labor flexibility, as well as productivity levels, will continue to affect individual economic growth performance, S&P concludes. Stable tax bases and deep capital markets will enable each of the five sovereigns to finance their deficits, although lower public spending as a share of GDP will result in more efficient capital utilization and better growth prospects for the U.S., Canada, and the U.K.