The U.S. economy grew 4.1% in Q2, supported by consumer spending and exports; growth and moderate inflation in the Eurozone continued to make progress; Brexit hit yet another roadblock as the deadline loomed larger.
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U.S. growth: Exports and consumers to the rescue The U.S. economy grew strongly in the second quarter at an estimated 4.1% annual rate (inflation-adjusted), according to the “advance” first estimate from the Bureau of Economic Analysis.
Though this release relies on incomplete data from other departments, two important trends were clear. First, the main drivers of growth in Q2 were consumer spending (core spending up 2% from Q1) with a hefty contribution from foreign trade, especially exports. Second, the quarter saw notable investment in inventory – likely due to restocking from unexpectedly strong exports. But for this restocking, the growth number would have been even stronger.
It’s worth noting that the robust growth for the quarter is underpinned by two relatively volatile factors, both of which depend in large part on global trade to fuel growth. Nonetheless, the absolute size of this past quarter’s growth isn’t bad news for observers worried about the current state of the economy.
European growth: Slow and steady Inflation and growth in the Eurozone are steadily improving, according to European Union figures. Growth for Q1 was at a 2.1% annualized rate (the latest figures available) . Inflation has shown real progress after years of struggle, reaching 2% year-over-year for Q2, a figure not seen since early 2012, the heart of the EU’s downward slide into recession.
That’s not to say all is well. Unemployment in France remains at about 9% and wage growth is stubbornly low, perhaps due to recent revisions in restrictive labor laws. Italy’s progress continues to be slow as politics makes coalition-building difficult; Greece is not yet back on its feet from an economic point of view, and the recent horrific fires have taken their toll both in lives and spirit.
But the European Central Bank (ECB) appears to understand the challenges. At its most recent monthly meeting, President Mario Draghi repeated the Monetary Policy Committee’s commitment to keep its strongly stimulative stance in place well into 2019 at the earliest; there appears to be little appetite to repeat the experience of 2010-2012, when the ECB raised rates, thereby provoking an 18-month period of negative growth and political upset.
Brexit: Blues again Prime Minister Theresa May has taken direct control of the UK’s negotiations with the EU, seeking to arrive at a unified, relatively accommodative interpretation of the mandate delivered by the Brexit referendum, in the wake of public bickering and resignations among her ministers.
However, her most recent stance has been rejected outright by EU’s Brexit chief negotiator Michel Barnier, posing new political pressures and renewing speculation that Prime Minister May’s leadership might not survive the negotiations needed to reach agreement before a rapidly-approaching deadline.
All data: Source: Bloomberg, July 27 2018, unless otherwise specified.