The transatlantic economy has proven to be remarkably resilient in the face of seismic shocks that have shaken the world. Despite full-blown war in the heart of Europe, ongoing pandemic uncertainties, supply chain disruptions, dramatic energy shifts, high inflation, tightening financial conditions, and tensions with China, the key drivers of the transatlantic economy – investment, trade and income – posted strong results again in 2022.
Transatlantic trade in goods reached an all-time high of $1.2 trillion last year. U.S. goods exports to Europe rose by 25%, led by surging U.S. energy flows. U.S. goods exports to Europe rose by 25%, led by surging U.S. energy flows. U.S.-EU trade in goods in 2022 – a record $909.45 billion – exceeded EU-China goods trade of $897.36 billion and was 25% higher than U.S.-China goods trade of $690.56 billion. U.S. foreign affiliate income earned in Europe reached a record $325 billion in 2022, while European affiliates in the U.S. earned an estimated $151 billion – less than in 2021 ($167 billion), but still the second largest annual figure ever.
U.S. foreign direct investment (FDI) flows to Europe dropped by just 4%, to $235 billion, in 2022, according to our estimates. That’s a solid figure considering Europe’s energy crunch and war on the continent. And it follows record U.S. investment in Europe of $244 billion in 2021 – the second strongest annual level on record.
These figures are emblematic of the dense ties that bind North America to Europe and form the solid geoeconomic and geostrategic ground from which each side of the North Atlantic can address tremors still to come in 2023 and beyond. The $7.1 trillion transatlantic economy remains the largest and wealthiest market in the world, employing 16 million workers in mutually “onshored” jobs on both sides of the Atlantic.
Transatlantic Tremors
U.S. and European economic growth is likely first to slow and then to gather speed over the course of this year. Overall for 2023, the International Monetary Fund expects the U.S. economy to grow by 1.4% and the euro area to grow by 0.7%. These levels are down from 2021 and 2022, but still positive. Growth is expected to accelerate in 2024.
One hinge variable is the war in Ukraine, which has replaced the pandemic as the greatest strain on global trade.1 Russia’s aggression may have shaken the world economy, but it has also reinvigorated the Atlantic alliance. North American-European unity has been remarkable, exemplified by tough and coordinated sanctions and export controls against Russia; herculean efforts to wean Europe off its dangerous dependence on Russian energy; considerable sums of military, political, financial and humanitarian support for Ukraine; and actions to strengthen NATO defenses. As U.S. Treasury Secretary Janet Yellen noted at the G20 Summit in November 2022, “ending Russia’s war is the single best thing we can do for the global economy.” We discuss Western efforts to support Ukraine and to sanction Russia in Boxes 3 and 4.
The war does, however, complicate the challenges facing the world’s central banks. Rarely has the world seen such aggressive monetary action from the stewards of credit. Leading the way, the U.S. Federal Reserve raised its benchmark rate seven times last year, from 0.25% to over 4%. The European Central Bank (ECB) boosted rates four times in 2022, taking the rate to 2.5% at yearend, while the Bank of England raised its rate eight times in 2022. Monetary policy works with a lag, so the residual effects of tighter global credit conditions (softer final demand, lower capital investment, reduced earnings) will become more evident in 2023.
One risk for 2023 is that central banks on both sides of the pond err on the side of keeping policies too tight for too long, as they focus on pulling headline inflation back to target. The prospect that each side of the Atlantic might flirt with recession in 2023 has tempered future inflation expectations. Indeed, it seems increasingly likely that economies on both sides of the economy may be able to find the elusive “soft landing,” avoiding a recession entirely while also continuing to manage headline inflation.
U.S. headline inflation, after reaching a peak of 9.1%, began to reverse in July 2022 and was running at a year-over-year rate of 6.5% in December. Slowing demand and easing supply chain constraints has helped alleviate pricing pressures on goods, while services inflation is expected to peak in early 2023. Inflationary pressures in Europe have also peaked, with lower energy costs helping to slow year-over-year price increases to 9.2% in December, versus 10.1% in November. Energy price caps, lower commodity prices, unclogged supply chains, and the cyclical effects of slower economic growth have converged to ease transatlantic inflationary expectations. The European Commission predicts 6.4% consumer price growth and 5.6% euro area inflation in 2023. Still, U.S. and euro area inflation rates are well above the Fed/ECB targets of 2%.
Price stability in Europe remains challenging given the war and the continent’s vulnerabilities to global oil and natural gas prices. Europe has avoided a full-blown energy crisis and in less than a year accomplished a remarkable reduction in energy imports from Russia. Gas prices have largely returned to levels seen before the war but are still roughly six times higher than those across the Atlantic. We discuss the transatlantic energy economy in Chapter 4.
Navigating Globalization’s Shifting Currents
Global turmoil has led to suggestions that the world has entered a period of de-globalization. A closer look reveals that technological, policy and commercial drivers are interacting to reshape, not curtail, global flows. Technological drivers are accelerating globalization, while policy and commercial considerations are leading to strategies of “derisking” and diversification, as we discuss in Chapter 3. These drivers are carving currents that carry some risks, but far greater opportunities, for the transatlantic economy.
Global flows of people, capital, and goods are facing steeper policy barriers, yet migration was at historic highs in 2020 and 2021, capital flows grew by more than 50% a year in 2019-2021, and goods flows hit a record high in 2021. Global trade in goods in September 2022 was 10% higher than the average for the pre-crisis year 2019, and slightly higher than the level before Russia’s renewed invasion of Ukraine. Still, goods are no longer the preeminent driver of global connections; flows of services, international students, and intellectual property grew about twice as fast as goods flows in 2010-2019. Data flows grew by nearly 50% annually during this period, and were turbocharged during the pandemic years, as we discuss in Chapter 5.
These flows are all strengths of the transatlantic economy. Knowledge-intensive and intangible-heavy global value chains are also more concentrated than others, largely in deeply intertwined North Atlantic connections, which we explore in this book.
North America and Europe have been among the main beneficiaries of the expansion of global flows, as we demonstrate in our annual surveys. Given the turbulence and tensions of recent years, officials on each side of the Atlantic are now acting to mitigate strategic vulnerabilities and to ensure that people and workers across our economies benefit from this increasing interconnectivity. We discuss the U.S. and EU “protect and promote” agendas in Chapter 3.
On each side of the Atlantic there is a rising chorus calling for “reshored” production and greater self-sufficiency. In Europe, some call for greater “sovereignty” in the digital sphere or in other sectors like medicines or critical materials. The risk is that such calls could lead to more entrenched protectionism that hampers the ability of transatlantic firms to compete fairly in markets on both sides of the pond and beyond. Particularly relevant in this context are current debates about the impact of the U.S. Inflation Reduction Act and the EU’s Green Deal and related subsidy measures, which we discuss in Chapter 4.
Lost in these debates is the fact that U.S. and European companies over many decades have woven a dense web of deep transatlantic connections that is proving to be a strength, not a burden, for both in a more competitive and disruptive age. The transatlantic economy remains the most interconnected, robust, and resilient commercial artery in the world, as we explain in the following chapters.