Euro Area Poised for Fastest Economic Expansion in a Decade
Euro-area economic growth remained solid in August even as services activity slowed, according to IHS Markit. A composite Purchasing Managers’ Index held at 55.7 last month, slightly below an Aug. 23 flash estimate of 55.8. IHS Markit said on Tuesday that although the region’s services sector expanded at the weakest pace since January, gross domestic product is poised to increase 0.6 percent in the third quarter, setting the stage for the best annual performance in a decade. “There’s good reason to be optimistic that the current spurt of growth has further to run,” said Chris Williamson, chief business economist at the London-based company. “Forward-looking indicators such as new-order inflows and future expectations have dipped to levels seen back at the turn of the year, but remain sufficiently elevated to suggest that any potential slowdown in growth in coming months will be only very modest.” The generally robust economic trend should come as good news to officials at the European Central Bank, who meet later this week to update policy. Economists surveyed by Bloomberg predict the Governing Council will unwind asset purchases over nine months starting early next year. Inflation is slowly picking up, even though at 1.5 percent consumer-price growth remains below the ECB’s goal. IHS Markit said companies’ input costs and output charges both hit three-month highs in August.
China August data to show economy solidly poised before key Party congress
After surprising pretty much everyone with solid growth in the first half, China’s economy has continued to motor along nicely with a flurry of data for August expected to show momentum will largely hold up through to the end of the year despite tighter policy. Annual growth in the world’s second-biggest economy picked up to 6.9 percent in the first six months of the year, as brightening global demand boosted Chinese shipments and resilient domestic consumption helped to cushion the impact of policy makers’ efforts to reduce debt and cool the property market. The growth momentum has surprised most China observers, especially in light of Beijing’s campaign to wean the economy off a years-long debt-fueled binge, with early fears of a sharper downturn well and truly put to bed. According to a Reuters poll of analysts, over the next few weeks a flurry of data for August is likely to back market expectations for growth to taper off only modestly from the first half’s pace, with some such as smaller firms seen bearing the brunt of tightening financial conditions. On the whole, the August data set should support views that China’s economy will be in good heart heading into a key political meeting of the ruling Communist Party and give policy makers a comfortable cushion through to the end of the year to deepen much-needed reforms.
Fed’s Brainard Says Caution Warranted on Further Tightening
Federal Reserve Governor Lael Brainard said the U.S. central bank needs to pay careful attention to underlying inflation before raising interest rates again, as longer-run price pressure trends appear to be lower. “My own view is that we should be cautious about tightening policy further until we are confident inflation is on track to achieve our target,” Brainard said in a speech at The Economic Club of New York on Tuesday. If inflation continues to fall short of the central bank’s 2 percent target, “it would be prudent to raise the federal funds rate more gradually.” Inflation has missed the Fed’s 2 percent target for most of the past five years and is currently showing inertia at low levels even as the economy continues to grow. Brainard said underlying inflation may be stuck in a lower trend after the financial crisis. Higher rates of resource use, and central bank signaling about tolerance for some overshoot of the inflation target, may be required to push trend prices higher. Brainard also said conditions have been met to begin running off the Fed’s balance sheet. “It could take a considerable undershooting of the natural rate of unemployment to achieve our inflation objective if we were to rely on resource utilization alone,” she said. “I believe it is important to be clear that we would be comfortable with inflation moving modestly above our target for a time.”