Overseas Headlines – August 31, 2018

Date: August 31, 2018 

United States:

U.S. Second-Quarter Growth Revised Up to 4.2% on Software, Trade 

The U.S. economy expanded in the second quarter at a slightly faster pace than previously estimated on revisions to imports and software spending, bolstering the strongest period of growth since 2014, according to Commerce Department data released Wednesday. The revisions to GDP, the value of all goods and services produced in the U.S., offer President Donald Trump another chance to stake his claim to the pickup in growth, as he did following the initial GDP report a month earlier. Trump had called the numbers “amazing” and “very sustainable,” declaring his policies, including the biggest tax overhaul since the Reagan era, a success. Even so, the pace of expansion is expected to cool from the second quarter as the tax-cut boost fades, a trade war threatens business demand and the Federal Reserve raises interest rates further. Economists surveyed by Bloomberg project a 2.9 percent expansion for the full year. Household purchases, which account for about 70 percent of the economy, have been supported by a strong job market and lower taxes. In addition, a rise in gasoline costs earlier this year has eased, reducing a risk to spending. The continuing acceleration in profit growth suggests corporate America is benefiting from strength in consumer and business demand. That, together with lower taxes, could bode well for further gains in investment this year, though after-tax profit growth cooled from the first quarter, when the cuts took effect.



Euro-Area Inflation Unexpectedly Slows as Trade Risks Rise

Euro-area inflation unexpectedly slowed in August, which may add to policy makers’ concerns as they prepare to pare back stimulus amid increasing economic risks. Consumer-price growth came in at 2 percent, below the 2.1 percent reading in July that economists expected to see repeated. The core measure, which strips out volatile components such as energy and food, fell to 1 percent, also below expectations. Inflation rates have leaped toward the European Central Bank’s goal of just below 2 percent in recent months on the back of higher energy prices, but underlying price pressures are still subdued and only building gradually. After recording the fastest economic growth in a decade in 2017, momentum has moderated this year and uncertainty around the outlook has risen. “The ECB is unlikely to be worried about today’s figures,” according to Commerzbank AG economist Christoph Weil. “It seems certain that increasing wage growth will sooner or later also boost inflation.” The euro was little changed after the report and traded at $1.1670 at 11:45 a.m. Frankfurt time. While unemployment stood at 8.2 percent in July, the lowest in almost a decade, economic confidence slipped to the weakest in a year this month as businesses and consumers fret over international trade tensions and political instability in Italy. In the U.S., President Donald Trump has all but declared the European Union his next target for new tariffs — despite an agreement to work amicably toward new rules of engagement. ECB Governing Council member Olli Rehn on Friday pushed back against “regrettable” tendencies to escalate trade woes, saying in a Bloomberg interview that he hopes “this unnecessary rhetoric would cease.”



India’s World-Beating Growth Not Enough to End Jobs Drought

The world’s fastest growing major economy isn’t growing nearly fast enough. That may seem like an absurd description for India, an economy the International Monetary Fund expects to expand 7.3 percent in the fiscal year through March 2019 and 7.5 percent in the next. Yet the reality is that even at its current pace, India is having trouble creating enough new jobs for its massive workforce or enough wealth to broaden its middle class. With its demographic tailwind and massive developmental needs, Asia’s third-biggest economy should be growing at double-digit rates. Holding India back are glacial economic reforms, a fragile banking sector, rigid labor laws and a spotty educational system that imparts limited skills to the 12 million young people who enter the job market each year. Prime Minister Narendra Modi is trying to address these challenges. He’s introduced a nationwide consumption tax, an insolvency code for companies and a program to boost domestic manufacturing under his signature Make in India campaign. Yet analysts generally agree that more needs to be done to open up the economy, attract foreign capital and generate the kind of wealth and business opportunities that has broadened the middle class in China, whose $12.2 trillion economy is more than four times as big as India’s ($2.6 trillion).  “It hasn’t embraced global trade and foreign direct investments in the way China aggressively succeeded,” said Jim O’Neill, a former Goldman Sachs Asset Management chair and ex-commercial secretary to the U.K. Treasury and who coined the acronym BRIC in 2001 to describe Brazil, Russia, India and China as a group. “India has created big wealth for a limited number of people at the highest income levels, but it hasn’t created a massive pool of consumers by creating hundred of millions of middle income class,” he said. India’s economy has averaged 7 percent growth since its reforms began in 1991 under Prime Minister P.V. Narasimha Rao. China, by contrast, expanded by an average of almost 10 percent each year since its economic opening and modernization started some 40 years ago.