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Why the US economy is ahead of the European one

  • By Erin Delmore
  • New York business correspondent

3 hours ago

image source, Getty Images

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

With a fast-growing economy, a strong job market and falling inflation, the US has outperformed its counterparts in Europe and elsewhere.

In terms of GDP, it recorded an increase of 3.3% in the fourth quarter of 2023, significantly exceeding economists' expectations of 2%.

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

“The U.S. is holding up much better than other countries,” said Ryan Sweet, chief U.S. economist at Oxford Economics. “It seems as if the engine of the US economy continues to run where it sputters in other countries.”

Experts say there are several reasons why the U.S. outperforms other nations.

1. Put trillions into the economy

As the Covid-19 pandemic brought in-person work and social life to a standstill, countries have had to grapple with how to support their citizens stuck at home – including many who lost their jobs or were unable to work.

In March 2020, Congress rushed to pass a $2.2 trillion stimulus package that poured cash into the pockets of American workers, families and businesses. Two more laws followed to keep small businesses afloat and workers employed.

This was the largest influx of federal money into the U.S. economy in history. About $5 trillion flowed to everyone from individuals earning an extra $600 in weekly unemployment benefits to state and local transit agencies strapped for cash without commuters.

“I think there was a whole generation of policymakers who learned the lesson from 2008 and 2009 that if you don't do something big and bold, the problems are going to last a long time,” said Aaron Terrazas, chief economist at Glassdoor.

“If you are careful, you prolong the pain. I think that’s one of the reasons why the fiscal response has been so much more forceful this time.”

This stimulus is still credited with maintaining consumer spending, which accounts for 70% of economic activity. This ability to spend despite high inflation was a boost.

image source, Getty Images

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

The scope of the U.S. rescue deal dwarfed what other countries were doing, although some such as Japan, Germany and Canada also made major progress.

European countries have a more robust social safety net than the U.S. and have been able to adjust existing programs without increasing spending. However, this short-term benefit could not offset the large 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 economic development. But a strong labor market has bolstered disposable income, which drives consumer spending.

The U.S. unemployment rate has been below 4% since February 2022, which is historic lows. And while prices have risen sharply, real wages have also risen. Low-income households saw some of the strongest real wage gains.

The USA also recorded a productivity boost in 2023 and grew at its fastest rate in years.

Julia Pollak, chief economist at ZipRecruiter, points to the flexible labor laws that allowed companies to cut staff at the start of the pandemic. This caused short-term pain for workers, but allowed companies to adapt to the situation and invest in new technologies.

She gave the example of hotels laying off workers and not hiring them back to pre-pandemic levels.

“They’ve just changed a lot. They have introduced self-checkouts and mobile check-in technology. They have reduced the frequency of housekeeping, eliminated room service because customers now prefer to use Uber Eats anyway, and pick up orders and deliveries.”

Hotels have become lighter, leaner and less staff-intensive, she said, a change that means they make a living off of what benefits workers in the longer term.

image source, Getty Images

The U.S. enjoys another advantage – the ability to replenish its labor market, particularly through immigration, at a time when the retirement of the baby boomer generation has slowed population growth.

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

This resulted in higher unemployment in the United States, but laid-off American workers were eligible for newly expanded unemployment benefits that put cash directly into their pockets.

3. Energy (in)dependence

The US is a net exporter of energy and experts say this has contributed to the strength of the US economy.

When Russia invaded Ukraine in February 2022 and energy prices skyrocketed, Europe absorbed the impact much more than the United States. Germany, a key European production location, relied on Russian natural gas via the Nord Stream 2 pipeline. His productivity was affected.

Higher energy prices drove up inflation in Europe in what experts called a “double shock” – the pandemic and then Ukraine.

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

He says gas prices in Europe rose almost 20% between the start of 2021 and 2022, while in the US they only rose 3-4%.

He pointed out that European countries are not only seeing a greater increase in prices, but also a greater propensity for companies to pass them on to consumers.

“Both factors contributed to inflation slowing more quickly in the U.S. than in many countries, particularly in Europe,” he said.

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