Economic Rebounds in U.S. and Euro Zone: Deceivingly Similar, Strikingly Different

Is the title of this new research  from Dallas Fed econs.

They say the rebound of GDP from the current recession is broadly the same. So this is deceivingly similar. However, what is strikingly different is productivity has also rebounded but this is not the case for Europe. So there are two puzzles here:

  • One why US grows at same rate given its productivity is higher than Europe? (which authors ask)
  • Two, how come Europe grows at the same rate as US given its priductivity rebound is much weaker (this authors do not ask).

It seems the productivity rebound explains why US has remained strong despite terrible winds from Europe. And this also explains why outlook for Europe is much weaker than US going ahead:

Nevertheless, productivity advances in the U.S. may explain why it has better navigated the financial headwinds blowing from the euro zone, where a sovereign-debt crisis is prolonging the downturn’s upheaval. By the same token, the weak euro zone recovery is exactly what can be expected given labor productivity’s poor performance. Provided the measurement errors are not so large that they invalidate the use of this variable as a proxy for TFP, the low-productivity problem is one that euro zone policymakers must address to eventually engineer a recovery strong enough to restore output to its prerecession trend. Meanwhile, the challenge for U.S. policymakers will be to figure out why, despite large TFP gains, that hasn’t happened yet in their own country.

US vs Europe research continues to throw some nice insights…

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