[author: Alain Closier]
The Economic and Financial Gap Between the United States and Europe: Will It Persist or Narrow?
What Are the Consequences for Businesses and Investors on Both Sides of the Atlantic?
The economic and financial gap between the United States and Europe, as highlighted by the recent growth figures and disparities in GDP per capita, appears to be widening and could persist or even deepen in the near future. While the U.S. economy continues to demonstrate surprising resilience, with projected growth between 2.5% and 3% in 2025, Europe's growth is expected to remain much lower, between 0.5% and 1%. This divergence has significant implications for businesses and investors on both sides of the Atlantic.
Implications for U.S. Companies and Investors:
For U.S. companies and investors, the weaker European economy offers attractive opportunities. U.S. companies can benefit from the relative "cheapness" of European assets. European companies are undervalued, despite having similar profitability prospects to their American counterparts. This offers U.S. investors a chance to acquire European assets at a discount. Additionally, the strength of the U.S. dollar, coupled with access to U.S. capital markets, facilitates cross-border transactions, making European assets even more appealing for acquisition.
Source: FTSE, IBES, LSEG Datastream, MSCI, S&P Global, J.P. Morgan Asset Management. US: S&P 500; Europe ex-UK: MSCI Europe ex-UK; UK: FTSE All-Share. Earnings data is based on 12-month forward estimates. Past Performance is not a reliable indicator of current and future results. Data as of 12 November 2024.
Implications for European Companies:
On the flip side, the economic divergence also presents opportunities for European companies, particularly when looking to expand into the U.S. market:
Large European Corporations: The U.S. market's size and purchasing power make it essential for large European companies to establish a strong foothold. U.S. capital markets, despite higher interest rates, offer better liquidity and more favorable conditions than European markets. This access can drive growth and enable expansion.
European Start-ups: For start-ups, the U.S. remains an attractive destination for growth. Relocating to areas like Silicon Valley can provide access to unmatched funding opportunities, a robust technological ecosystem, and higher valuations than those achievable in Europe.
Outlook for the Future:
The trend of U.S. economic outperformance is reinforced by several factors: the strength of the dollar, favorable market conditions, and ongoing geopolitical challenges in Europe, including the political uncertainty in France and Germany. The U.S. administration's policies, which may continue to favor a more market-friendly environment, contribute to this dynamic, making it less likely that the gap will close in the immediate future.
Source: LSEG Datastream, MSCI, S&P Global, J.P. Morgan Asset Management. The chart shows the current percentage discount of the index or sector 12-month forward P/E ratio vs. the equivalent for the S&P 500, and the average since 1995. Communication Services average is calculated using data from 1995 to 2000 inclusive and from 2005 to date, due to sector composition changes. Past performance is not a reliable indicator of current and future results. Data as of 12 November 2024.
Conclusion:
This economic divide has profound implications for strategic business decisions on both sides of the Atlantic. While Europe remains attractive for American investors seeking undervalued assets, the divergence creates long-term challenges for European companies looking to compete with the U.S. The next few years may see more European companies being acquired by U.S. firms, further cementing the financial and economic gap.
The result is an economic landscape where the U.S. continues to dominate, and European companies may find themselves increasingly at a disadvantage, unless they adapt to the shifting economic realities.
