From: lessgovt@gmail.com   
      
   The U.S. and European Economies Are Diverging   
   By Paul Hannon, Oct. 31, 2023, WSJ   
   The gap between the U.S. and European economies is widening, with growth and   
   inflation on different trajectories as the fallout from the war in Ukraine   
   weighs on Europe’s prospects.   
      
   The European Union’s statistics agency Tuesday said the combined gross   
   domestic product of the eurozone’s 20 members fell by an annualized 0.4% in   
   the three months through September, having increased by 0.6% in the previous   
   quarter.    
      
   This is a stark contrast with the 4.9% rate of annualized growth recorded by   
   the U.S. during the same period, more than double the pace of growth in the   
   previous quarter.    
      
   Added to this are signs that consumer-price inflation is easing in Europe’s   
   single currency area while it has increased recently in the U.S. Figures also   
   released by Eurostat showed prices were 2.9% higher in October than a year   
   earlier, the lowest    
   rate of inflation since July 2021. The core rate of inflation, which excludes   
   energy and food prices, fell to 4.2% from 4.5% in September.   
      
   Economic growth in the eurozone has lagged behind the U.S. since the global   
   financial crisis that struck in 2008, and that gap has widened since the onset   
   of the Covid-19 pandemic in 2020.    
      
   This divergence accelerated markedly after Russia’s invasion of Ukraine   
   pushed energy and food prices sharply higher, weakening household spending in   
   the eurozone. As a region that imports most of its energy, Europe has been   
   harder hit by an increase    
   in gas and electricity prices while the U.S., an energy exporter, has   
   benefited to some extent.   
      
   And globally, a switch in spending to services from goods and a slump in   
   international trade amid mounting geopolitical tensions hit large   
   manufacturers and exporters such as Germany particularly hard. Eurozone   
   governments have also spent less freely    
   than their U.S. counterparts in supporting demand.   
      
   “The German economy is currently stagnating; the obstacles of interest   
   rates, high energy prices and weak foreign demand are simply too great at the   
   moment,” said Geraldine Dany-Knedlik, co-head of economic policy at DIW   
   Berlin, an economic research    
   institute.    
      
   The widening growth gap and the narrowing inflation gap between the eurozone   
   and the U.S. suggest that the European Central Bank’s rate rises are having   
   a greater impact on an economy that already faced stronger headwinds.    
      
   “Our past interest rate increases continue to be transmitted forcefully into   
   financing conditions,” said ECB President Christine Lagarde in a news   
   conference last week. “This is increasingly dampening demand.”   
      
   Some critics of the ECB argue that by almost matching the Federal Reserve’s   
   rate rises while confronting stronger headwinds to growth from other sources,   
   eurozone policy makers will make the growth gap even wider.    
      
   “Having fallen behind the U.S. for the past 15 years, my worry is that we   
   may now suffer another widening of the difference in per capita income due to   
   a policy mistake,” wrote Erik F. Nielsen, economic adviser to Italy’s   
   UniCredit Bank, in a note    
   to clients.   
      
   Meanwhile, the eurozone’s weakness is holding back other parts of the world   
   economy. The EU’s imports from China in the first eight months of this year   
   were down 15.4% on the same period of 2022, while imports from the U.K. were   
   down 13.7%. Imports    
   from the U.S. were little changed as Europe looked to the world’s largest   
   economy to replace natural gas that it no longer buys from Russia.    
      
   In the wake of the invasion, energy and food prices have risen more sharply in   
   Europe than in the U.S. since the invasion, reducing the ability of households   
   to spend on other goods and services.    
      
   Households around the world have cut back on their spending on goods after   
   splurging during the Covid-19 pandemic and instead have focused on the   
   services they were denied during lockdowns. But that swing has been   
   particularly pronounced in Europe: By    
   August, retail sales in the eurozone were 7.5% lower than in January 2022,   
   compared with a 1.8% drop in the U.S.     
      
   Total consumer spending in Germany was 0.5% lower than a year earlier in the   
   three months through June, while in the U.S. it was 1.8% higher. In the third   
   quarter, U.S. consumer spending surged again, while consumer spending fell in   
   Germany.    
      
   The second blow for Germany and the rest of Europe has come through higher   
   costs for energy-intensive factories. Output cuts in Germany’s large   
   chemicals industry, among other sectors, meant industrial production in August   
   was 2.2% lower than the month    
   before Russia’s invasion of its neighbor, while in the U.S. production was   
   up 2.3%.    
      
   There are few signs that economic growth in the eurozone is set to pick up   
   over the coming months. October surveys of eurozone businesses released by S&P   
   Global last week pointed to the largest decline in activity since November   
   2020, with new orders    
   falling sharply and purchasing managers reporting the first reduction in   
   employment since January 2021. By contrast, a similar survey of U.S.   
   businesses pointed to a pickup in activity during October.   
      
   With eurozone wages rising at a slightly faster rate, households are beginning   
   to regain some of their lost spending power. While that should aid growth in   
   2024, parts of Europe face more deep-rooted challenges. Germany in particular   
   is wrestling with    
   whether to keep its energy-intensive chemicals industry on life support for   
   long enough to find new, renewable sources of cheaper energy.    
      
   While one member of the three-party coalition government supports energy   
   subsidies, the other two members have reservations. BASF, Europe’s largest   
   chemicals maker, Tuesday said sales in the first nine months of this year were   
   sharply down on the same    
   period of 2022, and announced that it would cut back on new investments.    
      
   “I am not a friend of subsidies, but for a certain period of time, I do   
   believe you should define an electricity price that will be sufficient for   
   industry until we have renewables and then energy-intensive industries will   
   have a chance to survive,”    
   said Martin Brudermüller, BASF’s chief executive.      
      
      
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