US Economy Outperforms Europe, Defying Recession Fears
The US economy continues to outshine Europe, dispelling concerns of a potential recession this year. US data has consistently exceeded expectations in 2023, with GDP growth of 0.5% and 0.6% in the first two quarters. In contrast, the eurozone has experienced disappointing GDP figures, with stagnation in the first quarter and a modest 0.3% increase in the second. While the UK has managed to avoid a recession, its GDP growth has been lackluster, estimated at 0.1% in each of the first two quarters of 2023.
As a result, US GDP in the second quarter was 2.6% higher than the previous year, significantly surpassing the eurozone’s 0.6% annual growth rate and the UK’s projected 0.3% increase. In fact, US GDP now stands at 6.2% above its pre-COVID level at the end of 2019. Eurozone GDP has risen by 2.7%, hindered by Germany’s underperformance, while UK GDP remains 0.5% lower than its pre-COVID level.
The US economy’s consistent outperformance can be attributed to several factors. Firstly, the less stringent COVID-19 measures imposed on the economy have allowed for greater flexibility. Additionally, expansionary fiscal policies, both during and after the pandemic, have provided a boost. Furthermore, the US economy’s status as a net energy exporter has shielded it from the impact of energy price shocks. Finally, the US has experienced a milder inflation shock, with an annual CPI rate of 3.0% in June, compared to 5.5% in the eurozone and 7.9% in the UK. The ongoing conflict in Ukraine has also had a greater negative impact on the European economy than on the US.
However, it is important to note that the US outperforming Europe is not a recent phenomenon. Even before the pandemic, US GDP experienced a total growth of 5% in 2018 and 2019, twice the rate of increase seen in Europe. This trend reflects the US economy’s consistently stronger labor force and productivity growth.
The US currently boasts a labor force growth rate of 1.8% year-on-year, boosted by high levels of immigration. Foreign-born workers now make up almost 20% of the US workforce. Additionally, productivity in the US is higher, partially due to longer working hours compared to Europe. Other contributing factors include increased investment, a more favorable regulatory environment, higher spending on education and research, greater utilization of technology, and deeper, more efficient capital markets resulting in lower funding costs.
The surprising strength of the US economy in 2023 is evident in the 17.5% increase in the S&P 500 stock market index year-to-date. In contrast, the main stock market index in the eurozone has risen by just 7%, while the FTSE indices in the UK have remained relatively stagnant. The continued strength of the US dollar further reflects the robustness of the US economy.
Overall, the US economy appears to be emerging from a challenging period, which included a global health pandemic, inflation shock, and significant monetary tightening. An additional accomplishment would be if the US Federal Reserve is able to conclude its rate hiking cycle before the European Central Bank and the Bank of England, despite the US economy’s stronger growth and lower unemployment rate.
In conclusion, the US economy’s performance continues to surpass that of Europe, driven by factors such as labor force and productivity growth, favorable economic policies, and resilience in the face of various challenges.