AXA IM: Monetary policy transmission possibly slower in US than in Euro area

AXA IM: Monetary policy transmission possibly slower in US than in Euro area

Monetair beleid
Fed dollar (kreatikar, Pixabay)

We explore the ongoing divergence between the US and the Euro area in terms of growth performance. We focus here on two non-mutually exclusive explanations, writes  AXA Group Chief Economist and Head of AXA IM Research Gilles Moëc.

First, that there are fundamental factors behind the acceleration in productivity in the US which are absent in the Euro area. Second, that although the monetary policy stance has been similar, the transmission to the real economy has been slower in the US.

Distinguishing 'structural' from 'cyclical' productivity gains is difficult in real time. 'Yet, we are tempted to link the current persistent improvement in US productivity to a steep acceleration in Intellectual Property Investment (essentially software and R&D) since the middle of the last decade,' writes Gilles Moëc. There is a rich academic literature on the positive effect at firm level of the adoption of IT techniques such as cloud computing.

While the focus of the current tech debate is on the promise of AI, it may well be that an acceleration in the diffusion of pre-AI digital technologies – perhaps aided by the pandemic shock – has been triggering a 'revolution by stealth'. Interestingly, the Euro area has completely missed the surge in IP investment. While the EU is currently under pressure to emulate the US IRA and Chips Act and engage in old-fashioned interventionist industrial policy, speeding up the disbursement of the Next Generation package, especially the digitalization leg, could prove more rewarding to boost productivity.

Besides, while data is not necessarily convergent across sources for the US, the financial national accounts suggest that the transmission of monetary policy to US businesses has been very limited so far, and slower than in the last episode of sustained monetary policy tightening 20 years ago. No such phenomenon can be observed in the Euro area countries for which up to date comparable data is available, such as France. Europe could thus be faced with a double whammy: the absence of a positive supply-side shock, and a swift transmission of the ECB’s stance.