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Why the American economy is ahead of that of Europe

  • By Erin Delmore
  • Economic correspondent in New York

Image source, Getty Images

As countries around the world have struggled to recover from economic setbacks caused by the pandemic, one has emerged particularly strong.

With a rapidly growing economy, strong job market and falling inflation, the United States has outpaced its counterparts in Europe and elsewhere.

In terms of GDP, it recorded a gain of 3.3% in the fourth quarter of 2023, well above economists’ expectations of 2%.

That puts the U.S. at 2.5% over the year, outpacing all other advanced economies and on track to do so again in 2024.

“The United States is holding up much better than other countries,” said Ryan Sweet, chief U.S. economist at Oxford Economics. “It seems that the engine of the American economy continues to hum where it falters in other countries.”

Experts believe there are several reasons why the United States outperforms other countries.

1. Inject billions into the economy

When the Covid-19 pandemic slowed in-person work and social life, countries were left wondering how to support their citizens stuck at home, many of whom lost their jobs or could not work.

In March 2020, Congress rushed to pass a $2.2 trillion economic stimulus bill that sent money into the pockets of American workers, families, and businesses. Two more pieces of legislation followed to keep small businesses afloat and the workforce employed.

This is the largest influx of federal money into the U.S. economy in history. Some $5 trillion was paid out to everyone from individuals earning an extra $600 in weekly unemployment benefits to cash-strapped state and local transportation agencies without commuters.

“I think there was a whole generation of policymakers who came out of 2008 and 2009 with the lesson that if you don’t go big and you’re not bold, the problems will last a long time,” Aaron said Terrazas, chief economist at Glassdoor.

“If you’re hesitant, you prolong the pain. So I think that’s one reason why the fiscal response was much more forceful this time around.”

This recovery is still credited with supporting consumer spending, which represents 70% of economic activity. This ability to spend despite high inflation has been a stimulus.

Image source, Getty Images

Some of the money put into household pockets ended up in excess savings, Ryan Sweet said, a war chest that Americans can dip into when they need it.

The scale of the U.S. bailout deal has dwarfed what other countries have done, although some, such as Japan, Germany and Canada, have also taken significant steps.

European countries have a stronger social safety net than the United States and have been able to adapt existing programs without increasing spending. But this short-term advantage could not compensate for the huge gap in the size of the stimulus measures.

2. A flexible labor market

High inflation has been a painful experience for many Americans and has shaped their view of the state of the economy. But a strong jobs market has helped disposable income, which drives consumer spending.

The U.S. unemployment rate has been below 4% since February 2022, matching its historic lows. And while prices have risen sharply, real wages have also risen. Low-income households experienced some of the strongest growth in real wages.

The United States also saw a productivity spike in 2023, growing at its fastest pace in years.

Julia Pollak, chief economist at ZipRecruiter, points to the flexibility in labor law that allowed companies to reduce their workforces early in the pandemic. This created short-term difficulties for workers, but allowed businesses to adapt to the present moment and invest in new technologies.

She cited the example of hotels, which have laid off staff and have not returned to pre-pandemic hiring levels.

“They’ve just changed a lot. They’ve introduced self-checkouts and mobile check-in technology. They’ve reduced the frequency of room cleaning, they’ve eliminated room service, because now guests tend to prefer using Uber Eats. anyway, and collect orders and deliveries.

Hotels have become lighter, leaner and require fewer staff, she said, a development that has made them viable and in the long run benefits workers.

Image source, Getty Images

The United States enjoys another advantage: its ability to replenish its labor market, notably through immigration, at a time when the retirement of the baby boom generation has slowed population growth.

The European approach favored paying companies to keep workers on their payrolls when lockdowns crippled businesses. The British furlough scheme paid employees 80% of their salary and lasted more than 18 months.

As a result, the United States experienced more severe unemployment, but laid-off American workers were eligible for newly expanded unemployment benefits, which sent money straight into pockets.

3. Energy (In)dependence

The United States is a net exporter of energy, and experts say that has contributed to the strength of the U.S. economy.

When Russia invaded Ukraine in February 2022 and energy prices skyrocketed, Europe absorbed the impact far more than the United States. Germany, a major manufacturing hub in Europe, depended on Russian natural gas via the Nord Stream 2 pipeline. Its productivity took a hit.

Rising energy prices have driven up inflation in Europe, in what experts have called a “double shock”: the pandemic then Ukraine.

The impact of the war in Ukraine on energy prices has been much worse in Europe than in the United States, said Ben Westmore, who oversees monitoring of the U.S. economy for the OECD.

Gas prices in Europe between the start of 2021 and 2022 climbed almost 20%, he says, while in the United States they rose only 3 to 4%.

He pointed out that European countries have seen not only greater price increases, but also a greater propensity for businesses to pass them on to consumers.

“Both of these factors have helped U.S. inflation moderate more quickly than in many countries, particularly in Europe,” he said.

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