Is the US economy outperforming Europe?

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I’m Valentina Romei, the FT’s economics reporter, and I am standing in for Martin Sandbu, who is on holiday this week. With Christmas upon us, it felt like a good time to talk about the long-term performance of the US economy relative to that of Europe.

In a world in which we report monthly economic growth down to the decimal point, you might be excused for thinking that the topic of the economic performance of two of the world’s largest economies over the past few decades is not controversial.

Yet, it is. There is an everlasting discussion on whether the two economies should be measured by market exchange rates — which, by definition, is heavily affected by exchange fluctuations — or purchasing power parity, which aims at showing what people can do with their money in each country, with quite complex calculations.

On market exchange rates, the EU economy was estimated at 68 per cent of that of the US in 2023, down from parity in 2007. At purchasing power parity, the output of the member states is 6 per cent smaller than that of the US, down from parity in 2007, according to calculations based on IMF data.

Many argue that the size of the economy is not the best measure of economic performance, with gross domestic product per capita growth being a better indicator, as it is ultimately what helps boost living standards.

The discussion about whether to measure GDP per capita at exchange rates or PPP is even hotter. EU per capita output shrunk markedly relative to that of the US over the past two decades, while it has been very volatile in an upward trend in terms of PPP.

In today’s column, I want to emphasise the advantages of using a third and simpler way to compare economic performances: using real GDP growth in national currency. This does not allow you to say which region or country is more prosperous in any given year, but it accurately shows which one grew faster, or at least as accurately as national data goes.

On that measure, using volumes in euros for the EU as reported by Eurostat, US GDP has grown much faster than that of the EU over the past two decades. However, the two economies have expanded at a similar pace in terms of output per capita. This is because the EU population has stagnated, while that of the US continued to grow.

So, that settles it you might think, as you recover from the Christmas meals: on the measure that matters, the EU and the US have been growing at similar levels. This must mean they have similarly successful economic models.

Unfortunately, it’s not quite so simple. This is because the US is still outperforming the eurozone and the UK, with per capita output growth rates since 2003 at 26 per cent, 18 per cent and 12 per cent respectively. The US performance has also dwarfed that of France, Spain and Italy. The latter has not grown for the past two decades, which in the EU is better only than Greece, whose economy has not yet recovered to pre-financial crisis levels.

The chart below allows you to compare GDP per capita trends across many economies, just look for the country in the search box.

The complicating factor in the story is that the EU average is boosted by poorer countries catching up with the rest of the region. GDP per capita in many countries, including Poland, Bulgaria, Romania and the Baltic countries, more than doubled over the same period. This is about four times the growth rate of the US. Some central European countries, such as Croatia, Czech Republic and Slovenia, have also strongly outperformed the US over the past two decades.

Regional differences are not a peculiarity of Europe. Data for US states is not historically comparable as the Bureau of Economic Analysis has updated its state GDP figures since 2017 but not yet for the years before. Assuming the change in methodology affects states in similar ways, some states, such as North Dakota, Washington and Utah, have greatly outperformed others, particularly Louisiana, since 2005. But the outperforming states including the richer ones with large economies, such as California or New York, also show strong growth rates.

You can compare growth rates across US states in the chart below:

Many say that the outperformance of the US compared with the EU should not be a reason for concern as, in addition to demographics, it largely reflects the energy shock that hit Europe. The US was not as affected by the energy price surge following Russia’s full-scale invasion of Ukraine because it is an energy exporter. Stronger US growth is also the result of the European sovereign debt crisis and the large US fiscal stimulus.

I am not sure this is reassuring considering that most of these factors will continue to weigh on Europe’s growth potential. At the same time, the impact of poorer countries catching up with richer ones could soon wane. That moment does not seem so far away considering that Poland’s GDP per capita is nearly 70 per cent that of Germany, up from only 42 per cent in 2003.

The last point to make is about Germany, whose GDP per capita at constant prices grew at a similar pace to that of the US over the past two decades.

That reflects the country’s rebound from when it was named the “sick man of Europe” in the early 2000s. Back then its economy was dragged down by the cost of reunification and an inefficient labour market, but a series of reforms has helped the country to become a strong EU performer in the pre-pandemic period.

Yet, clouds are gathering on the outlook for the German economy. Its current economic downturn is, for many, a sign of an existential threat to its economic model. The IMF forecasts that Germany will underperform the US over the next five years regardless of the measure you choose.

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