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IF Insights: Making sense of United States’ ‘economic supremacy’ over Europe

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The fact of the matter is United States has already outpaced Europe in terms of GDP and the trend will continue in 2024 too

The annual inflation rate in the United States has fallen back to 3.1% in January 2024, with GDP increasing at a 3.3% annualised rate. Economists were expecting 1.5% annualised GDP growth in 2023. They were certain about an impending recession, which would have forced the economy to grow at a 0.2% rate. Guess what? They have been proven wrong.

On the other hand, there is Europe, whose economy avoided a recession by the narrowest of margins. GDPs across the 20 countries using the currency Euro stagnated in the October-December 2023 quarter compared with the previous three months. Over the whole of 2023, GDP rose 0.5% both in the Eurozone and in the European Union.

Europe’s economy has been hit hard in the post-COVID period, affected by high inflation and rapid interest rate hikes. The Ukraine War 2022 also took the countries here to the verge of an ‘Energy Poverty’, as natural gas prices soared high in the continent, amid falling supplies.

Talking about the French economy, Europe’s second-largest, it grew 0.7% throughout 2023. German inflation fell in January to 3.1% in a buoying sign for the continent’s largest economy, whereas the United Kingdom saw an inflation of 4% in December. It is to be pointed out that the country faced the worst of the inflation and the cost-of-living crisis, throughout 2022 and for a good part of 2023, with food and energy bills remaining on the upward trajectory. The inflation hit a record-breaking 11.1% in October 2022.

Experts Not Happy

According to Christoph Weil, a senior economist at Commerzbank, “This (the current data on the European economy) does not really change the picture. The massive tightening of monetary policy brought economic growth to a standstill in the summer. It is unlikely that the economy will emerge from this weak phase before the spring.”

Weil also pointed out the “persistently high inflation” making it unlikely for the European Central Bank (ECB) to lower its key interest rates, apart from noting that the positive economic impact of the rate cuts (if happen) will only be felt from 2025 onwards. If the ECB doesn’t reconsider revising its interest rate, it will result in higher costs dampening the borrowing activities of households and businesses.

As per Jack Allen-Reynolds, a Eurozone economist at Capital Economics, “The region dodged a technical recession. This is just semantics though. The big picture is that Eurozone GDP has been flat since Q3 2022 when gas prices surged and the ECB started raising interest rates.”

Allen-Reynolds also expects the Eurozone economy to “flatline” in the first half of 2024 “as the effects of past monetary tightening continue to feed through and fiscal policy becomes more restrictive.”

The fact of the matter is United States has already outpaced Europe in terms of GDP and the trend will continue in 2024 too.

Government Spending Making The Difference

As the COVID pandemic disrupted the economy from 2020 to 2022, the United States mitigated it through a USD 2.2 trillion economic stimulus bill, named the Coronavirus Aid, Relief, and Economic Security Act (CARES).

The CARES Act, which stood as the largest financial rescue package in US’ history, provided benefits like unemployment assistance, business relief packages, tax breaks and credits, mortgage, student loan and rent relief, hospital and health care assistance, help for the state governments and last but not the least, earmarked spending for the sectors.

Economists credit these expenditures for the swift recovery of the US economy, with the pandemic-related recession lasting only three months.

“What the money did was to basically make sure that when we could reopen, people had money to spend, their credit rating wasn’t ruined, they weren’t evicted and kids weren’t going hungry,” said Louise Sheiner, an economist with the Brookings Institution, while interacting with the New York Times.

Meanwhile, Joe Biden became the United States President in 2020. His administration had to deal with the COVID and the economic fallouts caused by the Ukraine war. Domestic inflation soared to more than 9% in 2022. There were talks among economists on whether American households and businesses would be cutting back on their spending.

However, the American economy grew faster than expected in 2023. Things have been more than manageable for American households, in comparison to their European counterparts.

The Biden government spent massive money in the form of unemployment allowances, universal stimulus checks, and expanded child tax credits. All these moves resulted in the Americans accumulating enough savings to fight inflation. Also, average pay increases peaked at 6.4% and rose as high as 7.5% among the lowest-wage workers, which helped things further.

Uncle Sam went big and bold with his forceful fiscal spending, which helped to sustain consumer spending, which accounts for 70% of US’ economic activity.

In comparison, the United Kingdom provided 330 billion pounds in emergency support for businesses, apart from introducing a furlough scheme for employees, as COVID kicked in. There were plans like stamp duty holiday, cut to value-added tax (VAT) for the hospitality sector, job retention bonus for employers and the ‘Eat Out to Help Out scheme’, to boost the hospitality industry. The ‘Winter Economy Plan’ helped the British economy to sail through the pandemic disruptions throughout 2021.

As the cost of living crisis started in 2022, the UK came up with a 5 billion pound windfall tax on energy companies to help fund a 15 billion pound support package for the public. However, everything was undone by a 50-day disastrous rule of Liz Truss.

US’ Resilient Jobs Market

The unemployment rate in the US has been below 4% since February 2022. Despite inflation reaching close to 10% in 2022, real wages rose as well, with low-income households especially benefiting from the trend.

As per the Bureau of Labour Statistics, the unemployment rate remained flat for the third month in a row at 3.7% for January 2024. Job gains for the month were double the expected amount with the total coming in at 353,000.

For the week ending February 3, weekly jobless insurance claims decreased too, after remaining steady throughout 2023.

Now talking about the similar ratios in Europe, the Eurozone’s unemployment rate fell to 6.4% in November 2023, a record low since the ‘2008 Great Recession’.

However, the ratio is higher than that of the US. As per the International Labour Organisation, the global unemployment rate will rise to 5.2% in 2024, whereas in the United States, the same ratio has been below 4% since 2022.

Despite interest rate hikes (which cooled demand, borrowing and investment), the world’s largest economy, by October 2023, had been generating new jobs for 33 consecutive months. Some 14.4 million jobs were created at a record pace. The unemployment rate remained below 4% for 20 consecutive months, the best streak in half-a-century.

There were a record 161.6 million employed people in the country and the number has been at the higher territory since then.

If one makes the assumption of Uncle Sam outpacing Europe in the ‘Race of Economy’, he/she won’t be that dead wrong. While Washington has been able to prove the ‘Recession Alarmists’ wrong to some extent, Europe’s tale has been the opposite one, with the continent somehow avoiding ‘Technical Recession’ till now.

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