Today the European Central Bank described Europe as being fragile and vulnerable. In contrast, the US Central bank spoke of broad based strength across all categories.
What are the facts? Compared to the US, Europe has higher inflation, higher unemployment, weaker stock-markets and significantly lower economic growth.
And the gaps aren’t marginal – unemployment in Europe is 6.5%. In the US it’s 3.9%. And looking at basic measures like retail sales, the most recent reading in the US was a positive 4%; here sales slumped by 3%.
It seems to be a question for investors every year – which will do better – Europe or US?
As a fund manager I would wait for those January strategy pieces from experts telling me it was going to be Europe’s year! It was also (usually) going to be the year when stock selection would be key and Japan would re-emerge as an investment power-house!
As well as economic superiority, so far this year, US stocks are up nearly 20% while European averages are closer to 10%.
Why?
There are a number of reasons – some short term; others have longer to play out.
This has to date been a crisis-laden millennium. And it seems that with each crisis, the Eurozone permanently loses a few points of growth to the United States. French economist Francois Geerouf notes “For the past fifteen years, Europe has been falling further and further behind, shock after shock: the eurozone crisis, the Covid-19 pandemic, the war in Ukraine, the Great Financial Crisis have all followed quickly. GDP is only one measure of economic well-being but since 2007, per capita growth on the other side of the Atlantic has been 19.2%, compared with 7.6% in the eurozone”. In 2010 US GDP per capita was 47 percent larger than the EU while in 2021 this gap increased to 82 percent.
Take the response to the Pandemic. The US was prepared to run a deficit of twice what Europe was prepared to do to restore growth. The run of blockbuster numbers on the jobs front in the US is testament to this. This also under-pinned the consumer surge. US consumers remain resilient and have bettered many forecasts. The fact that the lowest paid Americans have experienced the strongest pay growth has played a role here. In Europe in contrast, the latest reading on consumer confidence is the lowest in 7 months.
Geography is also playing a role here and being physically closer to the Ukraine war is no doubt impacting on European confidence. Issues such as the supply and price of energy and the arrival of Ukrainian refugees keeps the war front of mind, much more so than in the US. This impacts on consumer confidence and spending.
If the US stock market didn’t have a stellar technology sector it would be closer to, or indeed lag, many European bourses. Technology stocks, with their run-away growth potential, account for about 30% of the US market while are practically non-existent in Europe. This year alone US technology stocks are up 50%. The US financial system itself also appears deeper, broader and more fluid, with a greater appetite for risk than a bank-heavy Europe. For example investment in the field of AI in the US has exceeded $450bn in the past decade, 10 times what we have seen in Europe.
So policy, geography and structure of capital markets are a big influence. Of course, this current situation can change and factors favouring Europe could dominate, but there are some factors which are not up for change.
Perhaps the greater source of the gap will be the fact that Europe is getting older and our workforce smaller. The workforce in the US (those aged 15-64) is still showing some growth whereas here it is contracting and will continue to do so. The total number of European has risen by 1.6% since 2012. The corresponding number for the US is over 6%. This ultimately is a key driver of economic growth. Unless Europe had a seismic shift in attitude to immigration. As John Train said “Demography is destiny”.
Of course there will be quarters, years perhaps, when European growth will edge out the US. But as Mohnish Pabrai noted in his book “The Dhandho Investor” successful investing is all about the odds and seeking to get them even slightly in your favour. Favouring the US over Europe strategically would seem to achieve this.
Tradewinds 