Europe Catches Up

| June 07, 2024

The European Central Bank (ECB) and the Bank of Canada (BOC) cut their key rates this week. This leaves room for the Federal Reserve (FED) to reduce rates this summer as well. These events are the result of a general convergence of the North American and European economies.

The United States has been the world’s economic driver for some time, with year-over-year real GDP growth of 2.4%. This compares to 0.53% in Canada and 0.4% in the eurozone. America is also the world’s productivity king, although the 0.20% productivity increase for the first quarter that came out this week is disappointing. I shall write more about that in the upcoming newsletter.

One reason that Canada became the first G-7 country to lower rates is its 2.69% annual inflation versus 3.36% in the U.S. Similarly, eurozone inflation of only 2.4% has allowed the ECB to reduce their already lower rates to 3.75%.

Another reason that cutting rates in Europe and Canada is easier than in the U.S. is that unemployment is more than 6% in both areas, versus 3.90% here. America has a low tolerance for unemployment when compared to many other countries. Our central bank also has a double mandate, which is to support low inflation and full employment, a difficult task.

We do not know if Europe and Canada will be able to keep easing. European nations have done a much better job of controlling spending than the U.S. However, they have underperformed America with investment and productivity. Lower rates are a big plus for European stocks, but European nations and companies will have to make sustainable investments if a quarter is to become a trend.

Still, the economic convergence with Europe has been noted in the financial press. On May 25, The Economist led with the headline “At long last, Europe’s economy is starting to grow: Now for the hard part.” Similarly, The Wall Street Journal’s Joshua Kirby observes that “data from the first three months of 2024 suggests the gap is narrowing. The eurozone matched the U.S. in growing at an annualized rate of 1.3% in the first quarter, and activity looks set to keep proving dynamic, according to a purchasing managers’ survey published Wednesday.”

I continue to believe that there is room for a Fed cut, but strong domestic employment and persistent inflationary pressures will keep U.S. rates higher for longer than many believed last year. This favors European markets. More details are to come in the monthly newsletter.

* Vieira, P. “Bank of Canada Cuts Rates to Become First G-7 Central Bank to Ease Policy.” The Wall Street Journal, Online, Central Banks. June 05, 2024. Accessed on 06.07.2024.

** “At long last, Europe’s economy is starting to grow.” The Economist, Online, Finance and economics | Soft launch. May 20, 2024. Accessed on 06.07.2024.

*** Kirby, J. “U.S. and Europe Are on the Same Economic Track After All” The Wall Street Journal, online, Economy | Central Banking. June 05, 2024. ‘ Accessed on 06.07.2024.