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U.S. economic growth figures due on Thursday will provide the latest clue for investors awaiting signals about when the Federal Reserve will start cutting interest rates from their current 23-year highs.
Economists surveyed by Reuters expect second-quarter GDP to grow at an annualized rate of 1.8 percent, up slightly from 1.4 percent in the first quarter, but with the world’s largest economy still slowing from the rapid growth seen late last year.
“We expect consumer spending to slow a bit and business investment to pick up a bit of steam,” said Gregory Daco, chief economist at EY-Parthenon. “It’s a pretty mixed picture, but it does point to a slowdown in the overall economy compared to a year ago.”
The data follows recent evidence that the U.S. economy is beginning to slow. Job growth has held steady in recent months, but the unemployment rate rose to 4.1% from 4% in June, the highest level since November 2021.
The Federal Reserve’s Beige Book, a survey of U.S. economic conditions compiled by regional Federal Reserve banks, suggested the U.S. economy is slowing, with five of the 12 regional bank districts reporting flat or declining economic activity, three more than in the May survey.
Inflation also fell faster than expected, hitting 3% in June, reinforcing views that a Fed rate cut is imminent. A quarter-point cut in borrowing costs by September is fully priced into the market, followed by one or two rate cuts before the end of the year. Thursday’s disappointing growth forecast is likely to encourage investors to further increase their bets on a rate cut. Kate Duguid
Is the Eurozone recovery stalling?
The euro zone’s struggling economy will be in focus on Wednesday as results from the latest purchasing managers’ survey are expected to shed further light on whether the tentative recovery is losing steam.
The S&P Global Purchasing Managers’ Index is expected to edge up to 51 after plummeting to 50.9 last month, pointing to a slight recovery in overall business activity.
“Previous sentiment data suggests the recovery is losing momentum and we expect August’s figures to show little improvement compared to June,” consultancy Oxford Economics said in a report.
Detailed PMI results are likely to show a continuing disconnect between weakening manufacturing activity and relatively strong growth in the larger services sector.
Economists polled by Reuters expect the services sector PMI to rise to 53 from 52.8. In contrast, the manufacturing PMI is expected to rise slightly to 46.3 from 45.8, well below the 50 mark that separates growth from contraction.
This echoes comments made by European Central Bank President Christine Lagarde last week, who said that “risks to economic growth are tilted to the downside.” She added that while the services sector was “leading the way,” manufacturing had “deteriorated in recent months” and investment “remains weak.”
Investors will also be watching the Ifo Institute’s survey of German businesses, which is due to be released on Thursday and is expected to show a slight increase in its economic activity index to 89 from 88.6 last month. Martin Arnold
Is the UK still seeing increased activity?
Investor attention will be focused on next week’s Purchasing Managers’ Index (PMI) reports for early signs of the economy’s health in July and the direction of underlying price pressures.
The S&P Global Composite PMI index, which tracks manufacturing and service activity, is expected to rise to 53 in July from 52.3 in June, according to Investec analysts.
Analysts expect data released on Wednesday to show the services sector led the gains, with analysts predicting the services sector index will rise to 53 in July from 52.1 last month. The manufacturing sector is also expected to see activity growth accelerate, with the index rising to 51.3 in July from 50.9 in June.
A reading above 50 indicates that the majority of companies are reporting business expansion.
“The clear result of the UK general election on July 4th may have reassured businesses that the new government has plenty of room to push through its legislative priorities,” said Sandra Horsfield, economist at Investec.
“This, and the new government’s focus on strengthening growth, should help businesses solidify their own plans for the future,” she added.
The monthly survey also shows changes in business input and output prices, providing an indication of price pressures that the Bank of England is closely watching as it decides when to start cutting interest rates from a 16-year high of 5.25%.
UK services sector inflation remained at 5.7% in June, above the Bank of England’s forecast. Horsfield said the reversal in price growth by services sector businesses seen in the June PMI data was “very welcome from the perspective of the Monetary Policy Committee.” Valentina Romei
