US and EU Economies: Same Bomb, Different Aftershocks

Europe Hit Hard by War and China's Economic Slump
EU Q3 GDP Falls 0.1%
US Surprises with 4.9% Growth on Strong Employment and Consumption

The economic aftershocks in Europe and the United States, hit directly by the Ukraine war and China's economic slowdown, are unfolding in different ways. Despite high-intensity interest rate hikes, the U.S. economy showed surprising growth, while Europe has effectively entered a recession phase. Analysts suggest that the economies of the two regions, which reached a crossroads after the 2008 financial crisis, have seen their gap widen further due to the unprecedented high-intensity tightening by global central banks.

Eurostat, the statistical office of the European Union (EU), announced on the 31st of last month (local time) that the GDP growth rate of the 20 Eurozone member countries in the third quarter of this year decreased by 0.1% compared to the previous quarter. In the second quarter, GDP had a brief increase of 0.2%, but it declined after just one quarter. In Germany, the largest economic engine of Europe, GDP shrank by 0.1% during the same period. The consumer price index in the Eurozone rose by 2.9% in October compared to a year earlier. This was a significant slowdown from 4.3% in September and marked the lowest level since July 2021.

In contrast to Europe, the U.S. economy is showing the opposite trend, supported by strong employment and consumer spending despite over 40 years of high-intensity tightening. The U.S. Department of Commerce previously reported that the U.S. GDP grew by 4.9% in the third quarter compared to the previous quarter. This is more than double the 2.1% growth in the second quarter and exceeds market expectations (Bloomberg 4.3%, Dow Jones 4.7%).

The difference in growth rates between the U.S. and Europe became pronounced after the Ukraine war, which caused a sharp rise in energy prices. According to the Wall Street Journal (WSJ), the seasonally adjusted GDP growth rate of the Eurozone slowed significantly to -0.1% in the fourth quarter of last year compared to the previous quarter. This weak trend continued with 0.2% in the first quarter, 0.6% in the second quarter, and -0.4% in the third quarter of this year. Meanwhile, the U.S. maintained solid GDP growth rates of 2.6% in the fourth quarter of last year, 2.2% in the first quarter, 2.1% in the second quarter, and 4.9% in the third quarter of this year.

The impact of inflation triggered by the Ukraine war was significant. Europe, which is highly dependent on energy imports, experienced higher inflation than the U.S., which exports energy, after the Ukraine war. The Eurozone's inflation rate surpassed that of the U.S. starting five months after the war began in July last year and remained higher for 15 consecutive months until September this year. Rising prices reduce household consumption spending and negatively affect economic growth.

The European Central Bank's (ECB) high-intensity tightening further cooled the already fragile European economy. The ECB raised its benchmark interest rate from 0% ten consecutive times from July to September last year, reaching 4.5%, before deciding to hold rates steady for the first time on the 26th of last month. As a result, the Eurozone's average monthly retail sales from January to August this year fell by 7.5% compared to January last year before the war. In contrast, although the U.S. Federal Reserve (Fed) also raised rates for a prolonged period like Europe, U.S. retail sales from January to August this year only decreased by 1.8%.

Geopolitical tensions, including U.S.-China conflicts, and reduced international trade due to China's economic slowdown dealt a direct blow to Germany's export-dependent economy, eroding the Eurozone's economic growth rate.

The Eurozone economy, which has entered a recession phase, is expected to find recovery difficult in the near term. The Hamburg Commercial Bank (HCOB) Eurozone Composite Purchasing Managers' Index (PMI), compiled by S&P Global, fell from 47.2 in September to 46.5 in October. A PMI above 50 indicates economic expansion, while below 50 indicates contraction. The October PMI was significantly below the market forecast of 47.4 and marked the lowest level since November 2020. Germany, the largest economy in the Eurozone, is expected to grow only 0.4% annually this year. Furthermore, if the war between Israel and the Palestinian militant group Hamas escalates across the Middle East, international oil prices could surge, causing inflation to spike again and prompting the ECB to raise interest rates further?an undesirable worst-case scenario that cannot be ruled out.

Eric F. Nielsen, Chief Economist at UniCredit Bank in Italy, said, "After lagging behind the U.S. for the past 15 years, we are now in a situation where we must worry about the per capita income gap widening further due to (ECB's) policy mistakes."

The WSJ reported, "The aftermath of the Ukraine war is weighing down Europe's economic outlook, causing the U.S. and European economies to follow different trajectories in terms of growth and inflation," adding, "The U.S. and European economies are diverging and widening the gap between them."

This content was produced with the assistance of AI translation services.