Recovery on the way

The economic headlines over the past week were dominated by growth figures in Germany and France and the Federal Reserve's assessment of the US economy.

In the US, consumer prices were flat in July in line with market forecasts, after rising 0.7 per cent in June. Fuel prices dropped 0.8 per cent after increasing 17.3 per cent the previous month, which helped to contain overall prices .

Compared to the same period last year, consumer prices declined 2.1 per cent, the largest decline since January 1950.

The Federal Reserve said on Wednesday that the US economy was showing signs of levelling out two years after the onset of the deep financial crisis. The bank kept its short-term interest rate steady near zero. Retail sales edged down in July following the 0.8 per cent increase that was registered in June.

On the other side of the Atlantic, the eurozone economy shrank less than expected in the second quarter when Gross Domestic Product contracted by just 0.1 per cent. What surprised economists, however, was that both Germany and France, the eurozone's two largest economies, returned to growth when their GDP registered a 0.3 per cent quarterly increase despite expectations of further declines.

Meanwhile, industrial production has unexpectedly fell by 0.6 per cent month-on-month in June and by an annual 17 per cent, defying economists' expectations of a monthly 0.3 per cent increase.

The British unemployment rate hit its highest level since 1996 in the period between April and June as it rose to 7.8 per cent above forecasts for a rise to 7.7 per cent.

However, the unemployment claimant count increase was slightly lower than expected at 24,900 for July after a revised 21,500 increase the previous month.

Meanwhile, the Bank of England's August inflation report warned that inflation would significantly fall short of the 2 per cent target in two years' time if interest rates are increased in the first quarter of 2010. While the bank was slightly more optimistic over economic prospects, it still urged caution over the outlook.

This article has been prepared by Bank of Valletta plc., which is licensed to conduct investment services business by the MFSA, for your general information only. This information is not a solicitation or offer by the bank to acquire or sell securities, nor does it constitute any form of advice by the bank. Appropriate advice should be obtained before making any such decision. Past performance is not necessarily a guide to future performance and the value of your investments may fall or rise.