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Economic growth: Europe closes the productivity gap

Eurozone countries are continuing to boost productivity vis-à-vis that in the US; consequently European equities are outperforming American ones.

In early 2005 I argued in this column that the eurozone productivity growth deficit on the US was smaller than the consensus believed and that it would narrow. I reckoned that US labour productivity had received an outsized cyclical boost from asset-price bubbles. This boost would not last.

It seems that my prediction is being borne out. The US-eurozone productivity growth differential has narrowed significantly in the past two years. In the past quarter, eurozone labour productivity (based on output per hours worked) grew by 1.5% year on year compared with 2% in the US.

Moreover, GDP data in the eurozone and in the US for the past few years have recently been revised. As a result, the starting gap in the level of labour productivity between the US and the eurozone, which had widened from five percentage points in 1995 to 15 points in 2004 on the old data, has been halved.

After 17 consecutive months of interest rate increases from the Federal Reserve, the US economy is running out of steam. Property price growth has ground to a halt. Consumers will have to tighten their purse stings from now on. US real GDP growth is set to grow at a below-trend 1% to 2% annual rate.

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