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In our Market Insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.
German economy shrinks despite eurozone growth
Germany's economy contracted in the second quarter, while the broader eurozone saw an increase in gross domestic product (GDP).
Eurozone real GDP rose by 0.3% from the first quarter of 2024, surpassing economists' predictions of 0.2% growth and matching the 0.3% growth seen in the first quarter.
This figure, however, fell short of the 0.4% growth forecast by the European Central Bank in June.
On an annual basis, eurozone GDP growth edged up to 0.6% from 0.5% in the first quarter, meeting the consensus estimate of 0.6%.
In contrast, Germany's GDP shrank by 0.1%, worse than the expected 0.1% growth. This decline was more than compensated by GDP increases in other major economies: 0.3% in France, 0.2% in Italy, and 0.8% in Spain.
Among smaller economies, Latvia's GDP fell by 1.1%, and Austria's GDP remained stagnant. Meanwhile, GDP grew by 0.1% in Portugal, 0.2% in Belgium, 0.9% in Lithuania, and 1.2% in Ireland. These preliminary figures do not yet include a breakdown of expenditures.
Market analysts noted that Germany’s economy has experienced negative growth for five quarters since the beginning of 2022.
Many are now predicting that the European Central Bank (ECB) will cut rates in both September and December, potentially reducing the deposit rate to 3.25% by the end of the year.
Other economists concur that the recent growth acceleration should not deter the ECB from implementing further rate cuts.
Spain inflation falls to five-month low in July as energy prices drop
A drop in food prices contributed to the decrease, with items such as butter, milk, pasta, flour, and chicken all becoming cheaper.
Preliminary estimates for Spain's year-on-year inflation rate for July show a decline to 2.8%, down from 3% in June, according to the National Statistics Institute (INE). This was the lowest figure in five months and below analyst expectations of 3%.
The decline was primarily due to falling food and electricity prices, although the cost of culture and recreation continued to rise at the same rate as the previous year.
The drop in food prices, including items like butter, milk, pasta, chicken, and flour, was largely due to Spain's temporary zero value-added tax (VAT) rate on basic food items being extended until September 30, 2024.
This regulation was first implemented early last year. Other sectors, such as domestic tourism and maritime transport, also saw price decreases, as well as certain tech products like computers and mobile phones.
The year-on-year core inflation rate for July, which excludes food and energy prices due to their inherent volatility, also fell to 2.8%, down from 3% in June, marking the lowest rate since January 2022.
The month-on-month inflation figure for July dropped to -0.5% from 0.4% in June, the largest fall since September 2022 and the first decrease in eight months.
Spain also reported its gross domestic product (GDP) numbers for the second quarter on Tuesday, with the country seeing a 0.8% quarter-on-quarter growth during this period.
Although this was the same as the previous quarter, it exceeded analyst expectations of 0.5%. The figure was mainly boosted by a 1.2% rise in services and goods exports, although imports declined by 0.2%.
Public administration spending increased by 0.2%, and household final consumption expenditure grew by 0.3%. Additionally, the industrial sector advanced by 0.4%, construction grew by 0.1%, and manufacturing inched up by 1.1%. However, the primary sectors fell by 1.2%.
The year-on-year GDP growth rate for the second quarter was 2.9%, up from 2.6% in the previous quarter, marking the fastest growth rate in over a year.
U.S. economy grows at a 2.8% pace in the second quarter, exceeding expectations
Economic activity in the U.S. was considerably stronger than expected in the second quarter, driven by robust consumer spending, increased government expenditure, and a significant inventory build, according to an initial estimate from the Commerce Department released on Thursday.
Real gross domestic product (GDP), which measures all goods and services produced from April through June, rose at an annualised rate of 2.8% when adjusted for seasonality and inflation. Economists surveyed by Dow Jones had forecasted a growth rate of 2.1%, following a 1.4% increase in the first quarter.
Consumer spending played a major role in driving this growth, alongside contributions from private inventory investment and nonresidential fixed investment. Personal consumption expenditures, the main proxy for consumer activity in the Bureau of Economic Analysis report, rose by 2.3% for the quarter, up from a 1.5% increase in Q1. Both services and goods spending saw substantial increases.
Inventories significantly contributed to the GDP growth, adding 0.82 percentage points to the total gain. Government spending also provided a boost, rising 3.9% at the federal level, including a 5.2% surge in defence expenditures.
On the downside, imports, which subtract from GDP, surged by 6.9%, the largest quarterly increase since Q1 of 2022, while exports rose by just 2%. Following the report, stock market futures drifted higher, and Treasury yields moved lower.
There was positive news on the inflation front: the personal consumption expenditures (PCE) price index, a key measure for the Federal Reserve, rose by 2.6% for the quarter, down from a 3.4% increase in Q1.
Excluding food and energy, core PCE prices, which the Fed monitors closely as a long-term inflation indicator, increased by 2.9%, compared to a 3.7% rise in the previous period. The chain-weighted price index, which accounts for changes in consumer behaviour, increased by 2.3% for the quarter, below the 2.6% estimate.
Final sales to private domestic purchasers, a variable the Fed considers a good indicator of underlying demand, accelerated at a 2.6% pace, the same as in the previous quarter.
However, the report also indicated a continuing decline in the personal savings rate, which fell to 3.5% for the quarter, down from 3.8% in Q1.
Despite some signs of weakening in the consumer sector, retail sales numbers have continued to rise, indicating that consumers are managing to cope with high interest rates and persistent inflation.
