Once neck and neck, the US and euro-zone economies are going their separate ways

Two roads diverged.
Two roads diverged.
Image: Reuters/Cathal McNaughton
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Although the US economy rebounded much faster than the euro zone’s after the global economic crisis, the rate of GDP growth in both economies has converged in recent years, with neither regularly besting the other from quarter to quarter. Indeed, economists recently marveled at how synchronous global growth had become.

In the second quarter of 2018, however, the growth differential between the US and euro zone was the widest since late 2014 (paywall), thanks to a tumescent 4.1% rise in the US versus two quarters of slowing growth in the euro zone. The latest quarter of euro-zone growth, released today, was around a third of the American result in the same period.

While global headwinds are partly responsible—Trump’s trade war has dented the optimism of European businesses, exports have fallen, and oil prices have climbed—several reports have pointed to a growing skills shortage in Europe that’s holding the continent back.

The diverging economic conditions are likely to push the US Federal Reserve and European Central Bank to make increasingly contrasting monetary policy decisions. That means that US rates will continue to rise and euro-zone rates will stay low, with implications for currency values and markets in general.