How major global economies diverged in the second quarter

Major economies diverged in the most recent quarter, underscored by a second straight decline in US gross domestic product while results for the eurozone shocked to the upside. Consumer spending in the US slowed in the April-June period, while Germany’s economy failed to keep pace with the rest of the continent. South Korea and Mexico also reported better-than-expected gross domestic product. Even so, the International Monetary Fund cut its global growth outlook for this year and next. Meantime, global inflation measures remain broadly elevated, with a closely watched gauge in the US rising the most in 40 years on an annual basis and Europe registering another record high.

US
The drumbeat of recession grew louder after the economy shrank for a second straight quarter, as decades-high inflation undercut consumer spending and Federal Reserve interest rate rises stymied businesses and housing.

Two key inflation gauges posted larger-than-forecast increases, heightening concerns that prices will remain persistently high and prompt continued aggressive interest rate increases from the Federal Reserve after a 75 basis-point rise this week.

The surge in the dollar this month to its strongest levels in decades has won a tacit endorsement from Washington, offering little official restraint to the currency in a notable shift from past occasions.

Europe
The eurozone economy expanded by more than three times the amount economists expected, putting it on a firmer footing as surging inflation and a possible Russian energy cut-off threaten to tip it into a recession.

Despite the upside surprise, Germany — Europe’s No 1 economy — stagnated. MEurozone inflation climbed to another all-time high, supporting calls for the European Central Bank to follow up its first interest rate rise since 2011 with another big move.

Consumer prices jumped 8.9 per cent from a year earlier in July — up from 8.6 per cent last month and driven again by soaring energy and food costs.

German business confidence deteriorated to the worst level since the early months of the pandemic on growing concerns that record inflation and limited energy supplies from Russia will throw Europe’s biggest economy into a downturn.

Asia
South Korea’s economic expansion accelerated last quarter, underpinned by household and government spending, providing scope for the central bank to keep raising interest rates as it tries to rein in inflation.

Japan’s prices are showing more signs of rising on a wider basis as soaring commodity prices and a weak yen force companies to pass higher costs to consumers at a pace not seen in decades. Multiple gauges of the deeper inflation trend hit record highs in June.

Emerging markets
Brazil’s inflation cooled slightly more than expected as President Jair Bolsonaro enacts a series of measures to tame the rising cost of living before elections and the central bank lines up another interest rate rise.

Mexico’s economic recovery continued in the second quarter, expanding more than expected even as soaring prices hit consumption. The country’s growth continues, in part, because it still has not recovered to pre-pandemic levels, said Gabriel Casillas, chief Latin America economist at Barclays.

World
The IMF cut its global growth outlook for this year and next, warning that the world economy may soon be on the cusp of an outright recession.

Global economic expansion is likely to slow to 3.2 per cent this year, less than the 3.6 per cent forecast by the fund in April and the 4.4 per cent seen in January.

The pandemic has left governments in the developed world with bigger deficits and debts. But there’s a more pressing problem: high inflation. And with supply chains still snarled, the standard recession-fighting measure of putting more cash into consumers’ pockets risks adding to the already intense price pressures.