Why the US economy overtakes Europe’s

As countries around the world struggle to recover from the economic downturn caused by the pandemic, one country is emerging particularly strong.

A rapidly growing economy, a strong job market, and low inflation have helped the United States outperform Europe and other countries.

Regarding GDP, it recorded an increase of 3.3% in the fourth quarter of 2023, well above the 2% expected by economists.

This gives the US an annual growth rate of 2.5%, outpacing other developed countries, and is expected to grow again in 2024.

“The US is holding up much better than other countries,” Oxford Economics Chief US Economist Ryan Sweet stated. “It seems like the engine of the US economy continues to hum along where it’s sputtering in other nations.”

Experts say that the US is outperforming other countries for a number of reasons.

1. Investing trillions of dollars in the economy

Countries had to consider how to help their citizens who were stranded at home because to the Covid-19 outbreak, as many of them lost their jobs or were unable to work.

Congress acted quickly in March 2020 to adopt a $2.2 trillion economic stimulus package that put money in the pockets of American businesses, families, and laborers. To support small enterprises and maintain employment levels, two new pieces of legislation were passed.

This was the biggest federal funding inflow into the US economy ever. From people earning an additional $600 per week in unemployment benefits to state and municipal transit agencies struggling to make ends meet with a lack of customers, about $5 trillion went to everyone.

Chief economist at Glassdoor Aaron Terrazas stated, “I think a whole generation of policymakers came out of 2008 and 2009 with the lesson that if you don’t go big and bold, the problems last for a long time.”

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

The stimulus package is still believed to have helped sustain consumer spending, which accounts for 70% of economic activity. Despite this high inflation, consumption capacity was boosted.

According to Ryan Sweet, some of the money that went into households’ pockets ended up in surplus savings, a war chest that Americans could access in times of need.

Some countries, such as Japan, Germany, and Canada, also made significant progress, but the scope of the U.S. relief agreement seemed smaller than what other countries were doing.

European countries have stronger social safety nets than the United States and have been able to adjust existing programs without increasing spending. However, this short-term gain could not offset the large gap in the size of the stimulus package.

2. A flexible job market

Many Americans have suffered greatly as a result of high inflation, which has affected their perception of how the economy is doing. However, a robust labor market has contributed to disposable income, which powers consumer spending.

Since February 2022, the US unemployment rate has been below 4%, which is comparable to previous record lows. Real salaries have also increased in tandem with the sharp price increase. Real wage growth has been best for low-income households.

In 2023, the US saw a surge in productivity as well as its fastest growth in years.

Julia Pollack, chief economist at ZipRecruiter, points to flexible labor laws that allowed companies to cut jobs early in the pandemic. Although this caused short-term pain for workers, companies were able to adapt and invest in new technology.

Using hotels as an example, she said that they fired employees and haven’t hired back to pre-pandemic levels.

“They’ve simply 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 customers tend to prefer to use Uber Eats anyway, and pick up orders and deliveries.”

She said hotels are becoming lighter and leaner, changes that mean staff are less focused and are making a living on something that will benefit workers in the long run.

The United States has another advantage. The key is to replenish the labor market, especially through immigration, as population growth slows due to the retirement of baby boomers.

When lockdowns caused businesses to collapse, the European approach favored paying companies to retain workers on their payrolls. Employees under the UK furlough program received 80% of their earnings throughout a period of more than 18 months.

As a result, unemployment in the US increased, but laid-off Americans were still eligible for recently enlarged unemployment benefits, which put money in their pockets.

3. Energy (in)dependence

Experts say that the US economy’s success has been aided by the country’s net energy exports.

When Russia invaded Ukraine in February 2022 and energy prices soared, Europe absorbed the impact much more than the United States. Germany, Europe’s main production hub, relied on Russian natural gas via the Nord Stream 2 pipeline. His productivity was affected.

High energy prices have pushed up inflation in Europe, in what experts called a “double shock” for the pandemic and subsequent Ukraine.

According to Ben Westmore, who is in charge of OECD’s US economic surveillance, the effects of the Ukraine war on energy prices were far more severe in Europe than they were in the US.

According to him, the increase in gas costs in Europe between early 2021 and 2022 was about 20%, whereas in the US, it was just 3-4%.

He made a point that price increases have been greater in European nations and that companies are more likely to transfer those increases through to consumers.

“Both of these factors have helped U.S. inflation moderate to a faster extent than in many countries, especially Europe,” he said.