A tale of two continents


by Chris Becker

The divergence between the US and European economies, including that of the real central power in Germany, continues with the recent economic data reinforcing this belief.

Earlier in the week the monthly manufacturing and services PMIs were released and Germany surprised on the all important former with a result barely scraping above expansion. Although the strength of the German economy skews the composite and aggregate European headline figure – which was nominally good – the individual PMIs, particularly France, weakened.

This comes on the back of renewed efforts by the ECB to stimulate the economy which seems mired in deflation, and last night another business survey – the closely watched German IFO – slammed future expectations of recovery.

Following this release, a poll of European economists by Reuters reinforced the notion that weak demand across the continent (caused by chronic unemployment and businesses unwilling to borrow money to expand) will not be magically reinvigorated by a new tranche of free money from the ECB mandarins.

As a result, inflation (currently sub 1%) is off the table unless lending to businesses grows at least 3% pa, currently at -1.6%: the deflation wagons are circling.

But across the pond, the picture is much clearer and brighter with a recovering housing market, lower jobless rate and growing manufacturing amid record low rates. The US manufacturing PMI released on Tuesday night Australian time registered another whopping expansion at 57.9 (above 50 denotes expansion)

House prices for July were up only 0.1% (on expectations of 0.5% increase) and although the drop in mortgage applications was unexpected, new home sales boomed last month to 504K sales, on expectations of around 430K units.


The momentum and breadth of the recovery will be measured a bit better tonight by the August durable goods orders summary later tonight, but Fed officials all this week (Philly, Chicago etc) have remarked on their content with the recovery, except in the area of jobs. But at least they are surpassing the European efforts in this regard:

euro unempoyment

Arguments regarding how to measure an economy’s “growth” aside, the reality is that Europe’s economy cannot match that of the US if its stuck on repeating the same mistakes of the past whilst ignoring its most fundamental problem – reducing unemployment.

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  1. the difference is not economic but military. US can still back it’s economy by the most dominant military in history. Europe doesn’t have that leverage.

    in the core both economies are just credit bubbles ready to explode. It will take a major international conflict to fix these economies.

    • perhaps, but the real difference is the currency union is not a full monetary union. The 50 US states have a federal monetary union and government dictating fiscal policy – the 18 EU members do not have this setup. It works for the Germans of course…

      • 50 states of US of A are not so equally satisfied with fiscal and monetary union as it seems.

        Many states would be much better off without the union. Income in Mississippi is only half the income in Maryland, and the reason for difference is not productivity or efficiency or anything similar but proximity to Capitol. Very similar to what’s going on in EU, with the difference that nobody even asks people of Mississippi about their opinion.

    • depends how you define cheap and expensive. The S&P500 could go up another 25-40% from here and Eurostocks go nowhere and remain cheap.

      Can you see why I consider trading easier than investing??? 😀

      • The Traveling Wilbur

        Can you see why I consider trading easier than investing???

        +many!! Investing money sitting in the bank. Losing money. ‘Play’ money hard at work trading.

        @TL “Fine for those who are prepared to have their life taken over by trading!

        As opposed to a ‘real’ job not doing that you mean?

        Wake me when the economy recovers to the point where there are some to apply for again. Meaningful ones that are worth doing for 36.25 hours per week.

  2. I am just wondering if we have seen a great natural economic experiment in operation since the end of the GFC, Chris?

    Both fighting deflation and unemployment, the U.S. has applied huge stimulus in easy money whereas the EU, while dropping monetary rates, has taken a far more austere approach.

    I understand there are lots of other different variables to be factored in respect of the two economies- but could it be that we have a textbook answer to fighting recession/depression in the future.

    PS. Another complicating factor is that uber-bear Zero Hedge is claiming the that so-called US recovery is illusory and the real crash is still to be played out.

  3. I am curious why ‘recovering’ housing markets are often cited as a measure of economic health? Do they mean values are rising or transactions are increasing, or both?

    Surely rising prices for anything are not per se indicative of economic wellbeing?

  4. Anyone who understands the difference of how the ECB & the FED work knows that “growth” in Europe would be weaker.