JPMorgan Chase discusses "dramatic changes in the global landscape": the "American exceptionalism" is declining, but the "rise of Europe" has significant uncertainties

The tide of the global economy is turning. JPMorgan Chase's latest research report indicates that the prevailing "American exceptionalism" of recent years may soon come to an end. Since the pandemic, the U.S. economy has shown strong recovery momentum, far surpassing other regions, but now, this gap is narrowing.

The report, led by Bruce Kasman and Joseph Lupton, poses a key question: Can the long-term superior performance of the U.S. economy be sustained? Analysts had originally expected U.S. economic growth to slow to around 2%, its potential level, but factors such as trade friction and fiscal tightening are expected to weigh on the rest of the world (ROW), thereby maintaining the relative advantage of the U.S.

However, recent developments have prompted JPMorgan Chase to reassess its views. U.S. policies seem to be shifting towards a stance unfavorable to business, while European fiscal policies are beginning to awaken, especially in Germany.

The End of "American Exceptionalism"?

The report points out that several key factors contributing to "American exceptionalism" are reversing:

• Government Spending: In 2023-2024, U.S. government spending has increased significantly, driving economic growth. However, now, DOGE's policies may lead to substantial cuts in government spending. In contrast, Europe is shifting towards more stimulative fiscal policies, particularly in defense and infrastructure.
• Price Shocks: The pandemic and the Russia-Ukraine conflict have caused inflation to soar in Europe. Now, with the possibility of a ceasefire in Ukraine increasing, natural gas prices have plummeted. Meanwhile, the U.S. is facing new price shocks as tariffs will push up inflation.
• Supply-Side Challenges: Over the past two years, U.S. productivity has surged, while European productivity has declined. JPMorgan Chase believes that as U.S. demand cools and immigration slows, U.S. supply growth has already begun to slow. In contrast, European supply is accelerating and is expected to further recover with the resurgence of demand.

European Recovery Under the Shadow of Trade Wars

JPMorgan Chase has significantly raised its economic growth forecast for the Eurozone for 2025-2026, expecting Eurozone GDP growth to approach 2%. This shift is primarily due to a series of fiscal stimulus measures announced by Germany's new coalition government, including infrastructure funds and defense spending exemptions from debt limits.

A chart in the report (Figure 2) shows that under the new Eurozone fiscal stimulus, Eurozone economic growth is expected to improve significantly. However, if the U.S. imposes a 25% tariff on USMCA, U.S. GDP growth may drop to around 1%.

Rising Risks of Global Economic Recession

Despite the improved outlook for Europe, JPMorgan Chase warns that the global economy still faces two major risks:

1. A trade war initiated by the U.S. against the EU, which would severely drag down Eurozone economic growth.
2. U.S. trade policies triggering a shock to business confidence, leading the U.S. and global economies into recession JP Morgan has raised its assessment of the risk of a global economic recession this year from 30% to 40% (Figure 3).

The report points out that a slowdown in the U.S. economy typically has about a 1:1 impact on other regions globally (Figure 9). However, if the slowdown in the U.S. economy is due to the drag from the USMCA, the financial transmission channels to regions outside North America may be relatively mild.

Diverging Confidence: Weakness in the U.S., Stability in Europe

The report also notes that even if a full-blown trade war is avoided, the back-and-forth threats may still be enough to slow global growth.

Currently, even as U.S. business confidence begins to wane, confidence in the Eurozone remains intact (Figure 10).

In February, both U.S. manufacturing and consumer confidence saw a significant decline. In contrast, confidence in Europe has not deteriorated significantly this year, although businesses overall remain sluggish.

Notably, as U.S. consumers exhibit a cautious attitude, consumer confidence in the Eurozone has been on the rise.

Conclusion: The Global Landscape is Being Reshaped

This report from JP Morgan paints a picture of a significant shift in the global economic landscape.

The halo of "American exceptionalism" is fading, while Europe may be poised for new growth opportunities. However, trade wars and policy uncertainties remain the sword of Damocles hanging over the global economy.

The road ahead is full of uncertainties, but one thing is clear: the world is becoming less "American exceptional."