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Will the Divergence in US-Europe Growth Persist?

Euro zone and U.S. growth rates will probably diverge this year, with the euro zone contracting while U.S. growth accelerates, but U.S growth will be similar to that in the euro zone next year, Legal & General Investment Management said in a new report.

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The growth gap will decrease in 2013, “probably from both directions”, according to Legal & General, which argues it is unlikely such an "unusually large growth differential" can be sustained.

"We would expect the gap to close in 2013 and probably from both directions,” said the report.

The United States economy grew 1.8 percent in 2011, while euro zone gross domestic productexpanded by 1.6 percent.

In its January 2012 World Economic Outlook report, the IMFsaid it expects growth in the euro zone to contract by 0.5 percent in 2012. For the United States, it forecasts growth of 1.8 percent. Like Legal & General, the IMF expects that gap to narrow somewhat in 2013, with growth of 2.2 percent for the U.S. and 0.8 percent for the euro zone.

In particular, the U.S. will likely experience strong fiscal contraction in 2013 due to the expiry of Bush-era tax cuts and the instigation of automatic spending reductions, Legal & General said. In contrast, many European countries have already adopted tight fiscal austeritymeasures, making it unlikely further austerity tactics will be attempted next year.

In addition the U.S. and euro zone economies are too closely integrated for permanent divergence, the report said.

“There are trade ties, with around 15 percent of exports imported by the other… Many U.S.-listed companies have subsidiaries within Europe, and in aggregate derive around a fifth of their earnings from Europe,” Legal & General said.

“Similarly, European banks have a significant presence in the U.S. and there is already some evidence of these banks tightening lending standards. U.S. banks also have direct exposure to European private and sovereign debt,” the report said.

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