US-Euro Area Industrial Production Divergence

By Marc Chandler, Global Head of Currency Strategy, Brown Brothers Harriman

This Great Graphic was created by an old friend Rab Jafri. Drawing on Bloomberg and Eurostate data, the chart depicts the performance of US and euro area industrial output over the past several years.

It shows that the US collapse in industrial output was not as steep as in the euro area, but the recovery began a bit later. Through Q1 2011, there was an apparent synchronized recovery. However, since than the divergence has become increasingly evident. The disappointing flash euro zone PMI, in contrast to greater than expected gain in the Markit preliminary US PMI,  warns that the divergence is widening further.

Some observers may argue that the out performance of the US is a function of the reluctance of the US to take its foot of the fiscal accelerator. This, we argue, is misleading. First, for the past few years, more often than not the US government sector was a net drag on GDP, with few exceptions. As fast as Washington may have arguably been spending, the states and local governments were cutting back even faster.

Second, the combination of the fiscal cliff and sequester resolutions while several European countries are given more time to reach deficit targets, means that US fiscal consolidation will be greater than the euro zone’s this year.

Third, the US may have gone for a more pro-growth strategy at the cost of more gradual fiscal consolidation and is saddled with a large deficit and mounting debt. The euro area went with fiscal consolidation and has poor growth to show for it and large deficits and debt. If it were a poker game, wouldn’t you prefer US cards over the euro zone, even if it is not a royal straight flush.


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Marc Chandler

Marc Chandler

Marc Chandler has been covering the global capital markets in one fashion or another for nearly 25 years, working at economic consulting firms and global investment banks. Chandler attended North Central College for undergraduate. He holds masters degrees from Northern Illinois University and University of Pittsburgh in American History and International Political Economy. Currently Chandler teaches at New York University Center for Global Affairss, where he is an associate professor.

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  • Alberto

    If it were a poker game, I WOULD QUIT, leave the table and go for a long vacation

  • http://RoyalStraightFlush Corvo

    Royal Straight Flush? The author needs to know what he’s talking about, on more than one level but by ending with such a faux pas he really does demonstrate the amusing art of implosion.

  • Very Serious Sam

    How about the graph for Germany?

  • Andrea Malagoli

    It is relatively easy to make the economy look good by printing an inordinate amount of money and increasing deficit spending without limits. If this were a poker game, I’d fold.

  • cc

    if it were a poker game, the guy who played with fake money will be brought to the backroom and his hands will be chopped off.

  • Geoff

    I don’t see any inordinate money printing, just fairly harlmess asset swapping. And the US deficit is actually on the decline.

  • Geoff

    What fake money?

  • Andrea Malagoli

    It is not “technically” printing now, but some of the effects are being the same. To say that the deficit is on the decline coming from $1Tn is a bit of a stretch.

    The size of the deleveraging is miniscule compared to where it needs be.

  • Tom Brown

    “Money printing” and deficit spending just might help with private sector deleveraging (which is the primary kind that concerns me). It certainly did during WWII!

  • Tom Brown

    Well if you consider debt based fiat money to be “fake” then looks like we’re ALL getting our hands chopped off! … all 7 billion of us.

  • Tom Brown

    “If it were a poker game, wouldn’t you prefer US cards over the euro zone, even if it is not a royal straight flush.” — yes!

  • Geoff

    You mean govt debt deleveraging?