Please lock the lock of the White House Watch Newsletter for free
Washington and your guide to what the world’s 2024 US election means
Imagine two typical middle class consumers. One is in the US and the other is in Europe. Both are thinking about buying a car and are reasonably informed about the news.
In the US, everything screams and buys. Donald Trump may have moved away from the sudden tariffs in Canada and Mexico, but the reprieve was temporary. Whether or not you believe that tariffs will raise prices, why risk it?
In Europe, actual income is on the rise, but the mood is sour. Trump is poses threats to harm the EU economy, and his words are becoming an automaker eager to sell, whether in Europe or Chinese. It makes sense to wait a little longer before taking the plunge.
These considerations are fictitious. But we already see this sentiment in economic data. At current rates, we cannot drive Americans out of the store, and we cannot persuade them to spend it on Europeans.
Some content could not be loaded. Please check your internet connection or browser settings.
The cyclical strength of US consumers is consistent with companies increasing investments far above pre-Covid levels. According to Citi, non-resident investment was 17% higher than the eve of the US pandemic, with 8% higher in the UK, over 8%, according to the company City. In the eurozone. The UK was doing better than its continental neighbours, many of which reflected some recovery after a horrifying period for business investment following the 2016 Brexit referendum.
In part, these trends reflect the differences in shocks Europe and the US have faced since Covid, with more intense energy shocks in Europe and the need to reduce Russia’s dependence on oil and gas. there is. It also reflects a fundamentally worsening recovery in post-pandemic productivity, especially in Northern Europe. And the same pattern is reflected in the weak consumer and business confidence.
Almost all international trends suggest that economic cycles differ significantly on both sides of the Atlantic. Since the global financial crisis of 2008-09, interest rates should only diverge significantly in response. Prices limit activity in Europe than in the US, where the animal spirit is high.
Europe needs a loose monetary policy, and Trump’s policy changes amplify the necessary differences. The new US administration is likely to offer lower taxes, while also having a considerable show of small spending cuts with some specific grants to federal organizations and foreign aid. In contrast, budgetary policies are tightening in Europe, and sharp fiscal consolidation is planned in the UK this year.
If Trump imposes a significant increase in EU tariffs, as he threatened, this will serve as a negative supply shock for the US, making it more difficult for the Federal Reserve to cut interest rates . As long as Europe is wisely choosing to retaliate, its effects will be a demand shock and a more lenient policy will be required.
Differences between economic forces and policy suggest the need for a significant separation between short-term and long-term interest rates, but so far, financial markets are in close sync. Long-term government borrowing costs have risen everywhere since September (though the gap has widened between 10-year yields for France and Germany and the US yields).
Some content could not be loaded. Please check your internet connection or browser settings.
This gap could expand, especially in the UK where borrowing costs are not separated from the US as they are in the eurozone. This is mainly because the Bank of England has shown more attention to reduction rates up to now than either the Fed or the European Central Bank.
Most importantly, when the US surrenders its international leadership in economics, Europe as a whole demonstrates that its policies are not subtly promoted by the US. So, both the government and the central bank are calling for declarations of independence from the United States while they seek to maintain close trading links as Trump allows.
chris.giles@ft.com
