From year to year, the gap widens between the United States and Europe. And it is not the latest figures for American growth, described here and there by economists as “spectacular”, which portend a change in trend. In the third quarter, the GDP of the world’s leading power increased by 4.9% at an annualized rate – double the previous quarter – compared to + 0.1% in the euro zone.
The monetary policy pursued since March 2022 by the American Central Bank (Fed) has, however, proven to be more restrictive than that of its European counterpart. The members of the Fed must meet this October 31 and November 1 to decide, or not, on a new rate hike or a continuation of the pause marked since September, while inflation in the United States remains at a level considered high (+3.4% over one year in September). According to economist Christian Parisot, advisor to Aurel BGC, the contrast between the strength of the American economy and that of the euro zone can be explained by several factors, including consumption and confidence in the economy. However, American momentum could run out of steam in the fourth quarter.
L’Express: Where does this gap between the United States and the euro zone come from, where growth is almost zero, while the Fed’s monetary policy is more restrictive than that of the European Central Bank?
Christian Parisot: It is mainly explained by the reaction of households. In Europe, you have an inflationary shock. What does the consumer do? He increases his savings rate, which is not at all intuitive. Generally, when you have pressure on your purchasing power, you reduce your monthly savings to compensate a little for this shock. In Europe, at the macroeconomic level, and Germany plays a large part in this figure, the savings rate, surprisingly, has increased.
Conversely, in the United States, American households have completely offset the shock to purchasing power through consumer credit. Even though the interest rates on these loans are around 23%, which corresponds to a historic high. It costs Americans a lot of money to maintain their standard of living through these credits, and yet they continue to do so.
Is it a question of confidence in the economy?
In the United States, the job market remains dynamic. The end of Covid also had an impact on psychology. Americans were keen to travel and consume services after the pandemic. And the economic recovery has been particularly strong. Furthermore, if you take the evolution of the median salary, we are still looking at increases of more than 5%. In the United States, unlike Europe, wages are growing faster than inflation. But a negative element could play a role: the end of the moratorium on the repayment of student loans, which had reduced the efforts of households.
The gap between the eurozone and the United States is widening from year to year. For what ?
The American economy is resilient, and it has not suffered the same shocks as Europe. The United States is much less affected by global tensions over energy because it is independent from this point of view. The American government has also granted a lot of aid to businesses with the Inflation Reduction Act (IRA), much more effective than the European Recovery Plan.
Then, Germany weighs on Europe’s overall balance sheet because it is very dependent on world trade, which is proving very sluggish at the moment. Overall, the American economy is not very open, unlike that of Germany.
Could these good figures for the American economy push the Fed to review its monetary policy?
That’s the paradox. As much as the third quarter was good, we think that the fourth quarter will mark a clear slowdown. Although I wouldn’t go so far as to say there will be a recession, as billionaire Bill Gross fears. After the very strong consumption in July, the end of the year promises to be more complicated, because consumer loans are very expensive and because the resumption of student loan repayments risks weakening certain households. The labor market is a little less tight and wage growth is a little slower, this could weigh on household consumption. More layoffs are also expected.
Finally, in the third quarter and this will be confirmed in the next, business investment is poorly oriented, this is linked to the tightening of financial conditions. The Fed will undoubtedly remain vigilant and say, like the European Central Bank: “Be careful, nothing is won”. She may estimate that the economy will be a little weaker in the coming weeks, which should encourage her to remain cautious.
Should the European Union accelerate to put in place a plan similar to the IRA?
In theory, yes, but we are not yet done with the latest recovery plan. Some countries, such as Italy, have not yet received funds from Europe because they have not made sufficient progress in the projects that can be financed. There are real administrative blockages. Europe, whether we like it or not, is dependent on a difficult international situation in which states can no longer spend without counting. Growth will remain lower for the long term in Europe than in the United States.
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