A month after dropping out of a Stanford University PhD programme in the spring of last year, Demi Guo and her friend Chenlin Meng had raised $5mn for their start-up.
The app they created, Pika Art, uses AI to produce wild video effects and threatens to make at least one aspect of traditional video and film production a thing of the past. Within a few months, it had more than a million users while the two founders, both aged 26, raised $135mn in just over a year.
Their story would be exceptional anywhere outside Silicon Valley, and is rare even there. But California’s famed network of mentors, innovators and investors helped make it possible, they explain. With investors, “there was mutual enthusiasm from the start”, Guo says, explaining that they “brainstorm ideas with us, help with recruiting and more. If I run into a problem, I can just text them, and they’re immediately helpful.”
For many economists, Guo and Meng’s success helps explain something else: why the US is growing so much faster than any other advanced economy. Its GDP has expanded by 11.4 per cent since the end of 2019 and in its latest forecast, the IMF predicted US growth at 2.8 per cent this year.
While last month’s US election was fought against a backdrop of the cost of living crisis, the country’s economic performance in recent years has been the envy of the developed world.
The US may have been less affected by the war in Ukraine than Europe, owing to its abundant domestic energy supplies, and rebounded more quickly than some G7 nations from Covid. But its growth record is rooted in faster productivity growth — a more enduring driver of economic performance.
US labour productivity has grown by 30 per cent since the 2008-09 financial crisis, more than three times the pace in the Eurozone and the UK. That productivity gap, visible for a decade, is reshaping the hierarchy of the global economy. Economic growth in the Eurozone has been a third of the US’s since the pandemic, and output is set to expand by just 0.8 per cent this year, according to the IMF.
Similarly, the economies of Japan and the UK have grown only by 3 per cent over the past five years. In fact, in productivity growth the US is rapidly outstripping almost all advanced economies, many of which are caught in a spiral of low growth, weakening living standards, strained public finances and impaired geopolitical influence.
In the UK, the new Labour government has promised a “decade of renewal” to solve what economists have called “the productivity puzzle”. Addressing low productivity growth is the IMF’s key recommendation for Japan, while a landmark report published in September by Mario Draghi, a former president of the European Central Bank, described weak competitiveness as an “existential challenge” for the EU.
Donald Trump will inherit a booming US economy when he enters the White House in January. Some economists question whether the policies he has indicated he will pursue — tariffs on US imports, mass deportations of immigrants and big tax cuts for the wealthy — might undermine the long-term advantages the US currently boasts, and risk a return to resurgent inflation and keep interest rates elevated.
Federal Reserve chair Jay Powell — whom Trump attacked in his first term as president — has acknowledged the uncertainty around the country’s productivity outlook. “The lore on productivity readings”, he told reporters in November, “is whenever you see high readings, you should assume they’re going to revert pretty quickly to the longer-term trend.”
But many expect the US to retain pole position and say other countries stand little chance of catching up. “Trump’s economic policies will tarnish US technology exceptionalism,” says Mark Zandi, chief economist of Moody’s Analytics. “But he will not undermine it.”
Increases in productivity — a measure of how efficiently resources are used in the economy — allow workers to earn higher wages, expand companies’ profitability and augment tax revenues, ultimately boosting living standards.
It is an indicator where the US has enjoyed remarkable success. In the three months to September 2024, according to official statistics, US output per hour worked was up by 8.9 per cent from its pre-pandemic level at the end of 2019, having expanded at annual rates between 2 per cent and 2.8 per cent over more than a year.
The contrast with its northerly neighbour is harsh. Canada’s labour productivity has contracted for 14 of the last 16 quarters and was 1.2 per cent below its pre-pandemic level at the end of the second quarter of 2024. Carolyn Rogers, senior deputy governor at the Bank of Canada, warned in March that weak productivity was an economic “emergency”, adding that “over the past four decades, we have actually slipped significantly compared with some other countries”.
Canada is not alone. Data from the Conference Board shows that, in the past few years, labour productivity has dropped relative to that of the US in most advanced economies. In the UK, the “productivity malaise” stretches back to the global financial crisis, says Bart van Ark, managing director at the UK-based Productivity Institute, blaming it on “chronically slow public and private investment and the lack of diffusion of the latest technologies and innovations across the economy”.
The Eurozone experienced a similar slowdown. Labour productivity grew by 5.3 per cent in the five years to 2007, but that dropped to 2.6 per cent in the five years to 2019 and just 0.8 per cent in the most recent five years. The US’s impressive strength in tech is the difference, Draghi wrote: “If we exclude the tech sector, EU productivity growth over the past 20 years would be broadly at par with the US.”
FT analysis of the EU Industrial R&D Investment Scoreboard, which tracks global top investors, suggests that pattern could be consistent across many other advanced economies. Most countries perform poorly when it comes to research and development spending, and there is also huge underrepresentation in fast-growing sectors.
Globally, the top R&D spenders are increasingly concentrated in software and computer services, a sector that has overtaken pharma, tech hardware and automobile manufacturing to become the leading destination for investment. It is dominated by US companies, often very large ones.
China is the only other large economy making significant strides in tech R&D spending. Xi Jinping’s government recently announced plans to make the country the “primary” centre for AI innovation by 2030; according to OECD data, the amount of venture capital invested in AI in China is now the second highest globally after the US.
Other advanced economies show little sign of this dynamism. According to data by Preqin, the US accounts for 83 per cent of the amount of VC funding in G7 economies over the past decade. The country also attracted 14.6 per cent of the world’s overall greenfield foreign direct investment in the first 10 months of 2024, according to fDi Markets data — a record high. Germany, by contrast, registered its lowest share of global FDI in 18 years.
The era of unassailable American productivity growth is relatively new. In the years after the second world war, the US economy experienced high growth but productivity in most European economies and Japan caught up.
In the three decades to 1980, in countries that are now in the Eurozone, labour productivity quadrupled while during that decade, Japan dominated consumer electronics and vehicle production, leading to angst in the US that it would become the world’s biggest economy.
According to Andrea Colli, professor of business history at Bocconi University in Italy, the improvement was largely down to reconstruction efforts partly funded by the US via the Marshall Plan, which poured over $13bn into the continent’s battered economies.
But he also points out that “productivity growth was stronger in Europe and Japan than in the US . . . for more than two decades, thanks to technological advancement and management improvement”.
By the 1990s, progress had stalled. As the information and communication revolution gathered pace, US productivity began to outpace that of other advanced economies where such sectors were less represented.
That gap widened after the financial crisis, and many experts, including the Bank for International Settlements, have pointed to lagging investment in other advanced economies.
The trend also reflects a different concept of competitiveness, argues Samy Chaar, chief economist at the bank Lombard Odier. “Americans are striving for innovation productivity, which is investment-led, while the rest of the world seems to be in another economic logic,” he says. “They are very much more focused on cost competitiveness.”
The US displays more tolerance of risk, at both an investor and government level. “[US investors] take greater risk across everything in tech than any other country,” says Michael Buhr, a Canadian tech entrepreneur now based in Silicon Valley who leads C100, a non-profit that supports Canadian tech entrepreneurs. Successful investments create additional venture funds, which in turn spawn new entrepreneurs and businesses — something Buhr describes as a “flywheel effect”.
Many of Europe’s entrepreneurs are not so fortunate. Justus Lauten founded foodforecast, which employs AI to help food businesses create more accurate sales forecasts, but says he would not recommend starting a business in his native Germany. “I think the venture capitalists [in Germany] are very risk-averse.”
Nicolò Mazzocchi, the co-founder of Skillvue, a Milan-based firm whose AI-powered tool helps companies analyse the skills of job applicants, secured early financing from an Italian bank. But he says this experience was “extremely difficult”, adding that “investors are very scared to be the first mover — it’s the biggest challenge in the early stage”.
Phillip Sewell, CEO and co-founder of Predyktable, a UK-based firm that has developed a platform to help companies predict demand for things such as inventory and labour, says he found himself battling with the UK tax authorities over tax reliefs on R&D.
“The government talks about supporting start-ups and scale-ups, but I found that it’s very difficult,” Sewell says. Government agencies are “still very risk-averse, [with] very much a ‘Doubting Thomas’ type of attitude”.
In the EU, complex regulation, a lack of top-ranking academic institutions and smaller and more fragmented markets are among other barriers to innovation highlighted by the Draghi report. These findings are in line with a leading European tech survey published by Atomico in November.
Even if European firms attempt to expand in the US-dominated tech and social media market, “there’s no room for a British or French company to come in and try to compete”, says Robert Gordon, an economist at Northwestern University.
“They’re not just too small, but they’re too late.”
The challenge for other advanced economies is not just replicating America’s dynamism. It is to do so while retaining their cherished social safeguards.
For all its economic power, the US has the largest income inequality in the G7, coupled with the lowest life expectancy and the highest housing costs, according to the OECD. Market competition is limited and millions of workers endure unstable employment conditions.
Europe’s social safety net needs to be paid for, warned Christine Lagarde, president of the European Central Bank, in a speech in November. Boosting competitiveness is necessary for long-term prosperity, she argued: “Failure to do so could jeopardise our ability to generate the wealth needed to sustain our economic and social model.”
There are countless initiatives under way, ranging from Canada’s Strategic Innovation Fund and the UK’s venture capital schemes and Smart Grants programmes to the EU’s European Tech Champions Initiative and Horizon Europe — a funding programme for research and innovation with a budget of nearly €100bn.
Many are aimed at tackling skills shortages and encouraging more people to study science, technology, engineering and maths. Since 2017, Canada’s Global Skill Strategy programme has facilitated work permits for people deemed high-skilled. The EU has proposed a “talent pool”, an online platform connecting jobseekers from elsewhere with job vacancies in the bloc.
Yet these efforts are insufficient; the Draghi report estimated that €800bn of investment annually — around 4.7 per cent of EU GDP — is needed to prevent the bloc from falling further behind the US and China. He also advocated integrating capital markets, boosting investment in universities and reducing regulation.
The Bank of Canada has also urged the country’s government to close the investment gap with the US and create incentives to allow companies in high-value industries to grow and thrive. Japan has pledged $13bn of government support for domestic chip production and investment in generative AI while the UK’s chancellor, Rachel Reeves, has committed to an additional £100bn of capital spending over the next five years to boost productivity growth.
But Nathan Sheets, chief economist at Citigroup, says that despite these efforts and China’s push to become an AI superpower, the US is the “place where AI is happening, and will continue to be the place where AI happens”.
The prospect of a second Trump administration has made many economists nervous. Mahmood Pradhan, head of global macro at Amundi Investment Institute, says that both tariffs and deportations of migrants are “negative for investment”.
“We’re going to have an increasing share of GDP devoted to paying interest on the federal debt,” says Northwestern’s Gordon. “It’s another drain away from potential funds available for investment.” Heightened pressure on prices could also be detrimental to investment, analysts suggest.
But for many experts, America’s position is secure. “The US has a whole ecosystem to promote innovation and its impact on the economy via productivity gains,” says Chaar. “There is a lot of ground to cover for the rest of the world.”
If anything, says Zandi, “Europe will struggle with the heightened economic and geopolitical uncertainties created by Trump’s policies and will need to invest more in defence, limiting the resources it has available.”
Economists polled by Consensus Economics expect growth of 1.9 per cent next year in the US, the fastest of any G7 economy. Looking 10 years ahead, they still forecast the fastest growth.
It’s like watching a 100-metre final where someone wins by a very wide margin, says Simon Gaudreault, chief economist at the Canadian Federation of Independent Businesses. “We’re left wondering: is it because those nine were all much weaker, or is it [because] that competitor ahead of the pack found a secret formula?”
Additional data visualisation by Alan Smith
