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US growth figures on Thursday will provide the latest clue to investors eager for signals on when the Federal Reserve will begin to lower interest rates from their current 23-year high.
Economists polled by Reuters are expecting GDP to have grown at an annualised rate of 1.8 per cent in the second quarter. While that would be a slight pick-up on the first quarter rate of 1.4 per cent, the big picture for the world’s largest economy remains a slowdown from the rapid growth seen at the end of last year.
“We’re expecting . . . a bit of a slowdown in consumer spending, plus a little bit more momentum in terms of business investment,” said Gregory Daco, chief economist at EY Parthenon. “It’s a fairly mixed picture, but one that shows a deceleration overall in the economy on a year-over-year basis.”
The data follows recent evidence that the US economy is beginning to slow. While jobs growth has remained robust in recent months, the unemployment rate in June ticked up to 4.1 per cent, from 4 per cent, the highest level since November 2021.
The Fed’s beige book, a survey of economic conditions in the US compiled by the regional Fed banks, suggested that the US economy was slowing. Five out of the 12 Fed districts reported flat or declining economic activity, three more than in May’s survey.
Inflation has also fallen faster than expected, hitting 3 per cent in June, fanning expectations that Fed cuts are imminent. A quarter-point reduction in borrowing costs by September is now fully priced in by markets, with one or two cuts to follow by the end of the year. A growth disappointment on Thursday is likely to push investors to further increase their rate cut bets. Kate Duguid
Is the Eurozone recovery faltering?
The Eurozone’s faltering economy will be in the spotlight on Wednesday when the results of the latest survey of purchasing managers will shed more light on whether its tentative recovery is running out of steam.
S&P Global’s purchasing managers’ index is forecast to signal only a slight pick-up in overall business activity, rising slightly to 51, after a sharp drop to 50.9 last month.
“With earlier sentiment data showing the recovery is losing momentum, we expect the August numbers will show little improvement over June,” the consultancy Oxford Economics said in a report.
The detailed PMI results are likely to show a continued divergence between falling activity in the manufacturing industry and relatively strong growth in the larger services sector.
The PMI for services is forecast to rise from 52.8 to 53, according to economists polled by Reuters. The manufacturing PMI, by contrast, is projected to inch up from 45.8 to 46.3, leaving it well below the 50 mark that separates growth from contraction.
This echoes European Central Bank president Christine Lagarde, who said last week: “The risks to economic growth are tilted to the downside.” She added that services were “leading the way” while manufacturing had “declined in the last few months” and investment also “remains weak”.
Investors will also check the results of the Ifo Institute’s survey of German businesses, which is expected to show a slight pick-up in its business climate index from 88.6 last month to 89 when it is released on Thursday. Martin Arnold
Is UK activity still picking up?
Investors’ attention will be focused on purchasing managers’ indices, or PMIs, next week for early signs of the economy’s health in July and the trend of underlying price pressures.
The S&P Global composite PMI index, which tracks activity in the manufacturing and services sector, is expected to rise to 53 in July, up from 52.3 in June, according to analysts at Investec.
They expect that the data, published on Wednesday, will show that the increase has been driven by the services sector, for which analysts forecast a rise to 53 in July from 52.1 the previous month. The manufacturing sector is also expected to show accelerating activity growth, with the index rising to 51.3 in July from 50.9 in June.
A reading above 50 indicates a majority of businesses reporting an expansion.
“The clear outcome of the UK’s general election on 4 July may have reassured firms that the incoming government has plenty of scope to push its legislative priorities through,” said Sandra Horsfield, an economist at Investec.
“This, and the new government’s key focus on strengthening growth, should help companies to firm up their own plans for the future,” she added.
The monthly survey will also show businesses’ input and output price changes, providing a measure of price pressures that has been closely watched by the Bank of England as it decides when to start cutting interest rates from their 16-year high of 5.25 per cent.
UK services sector inflation remained at 5.7 per cent in June, above the BoE’s forecast. Horsfield said that a reversal of the increase in the price charged by businesses in the services sector seen in the June PMIs data “would be very welcome from the Monetary Policy Committee’s perspective”. Valentina Romei
