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Current economic review: US and Europe

US economy growth shows few signs of trade concerns

The US economy has achieved positive readings for growth, inflation and employment. The stimulus effect from tax cuts led to a higher growth in the second quarter of 2018 and could be maintained for at least another quarter. A gradual rise in both the rate of inflation and wage growth have been registered as companies respond to labour market shortages and try to push through price increases.

Second quarter gross domestic product (GDP) data provided validation of the current favourable situation for the US economy. The annualized growth rate of 4.1% was enhanced by higher consumption and investment, as tax cuts passed late in 2017 stirred spending.

Further to that, third-quarter GDP estimates remained close to 3%, and the statement from the U.S. Federal Reserve's July meeting mirrored the stable flow of positive data in terms of growth, spending, investment and the labour market. Interest rates were left on hold, but the Fed's messaging boosted universal expectations among market participants that the year's third rate increase would likely occur in September.

Wage growth was unchanged at 2.7% year on year in July's labour market report. This implied that it failed to respond to the solid pace of job creation, which retained momentum to show an average of approximately 224,000 positions added over the past three months. In addition to, July's core Consumer Price Index data beat consensus forecasts, with an annual rise of 2.4 per cent marking its highest point since 2008.

It is clear that the US economy has been growing but there is a main factor that ultimately could affect results – President Donald Trump. There is major uncertainty, not only in the US but also around the world, regarding the ultimate impact the Trump administration will have, especially in terms of trade policies. Chaos in markets is evident among countries that have been greatly impacted by the Trade Tariffs he has set in place specifically China, Turkey and Iran.

Early in August, the U.S. and China announced further tariffs on the other's imports, increasing the total amount affected to $100 billion. In fact, uncertainty over trade was reflected in the Fed funds futures market, which pointed to a fourth rate rise in December, but indicated a pause until June 2019 before another rate hike was likely to occur.

Domestic strength supports growth in Eurozone regardless of trade gales

Meanwhile, across the pond, data for the second quarter showed the Eurozone economy had continued its measured slowdown since the start of the year, even though the annual growth rate of 2.2% remained fairly healthy. Part of the reason for the slower growth appeared to be worries among exporters over trade.

In June, new orders among German manufacturers recorded their largest monthly fall since the start of 2017. Though on a more appeasing note, trade negotiations between the EU and the United States offered some encouragement on that front. The two sides agreed to hold off on any new tariffs for the time being, lifting the instant threat of measures against European car manufacturers.

At its July meeting, the ECB repeated its belief that the Eurozone's expansion was significantly robust for it to cease its bond purchases by the end of 2018, as first announced in June.

In a succeeding monthly bulletin, the ECB stressed the importance of the labour market's continued improvement in helping to boost consumption. June's unemployment rate remained at 8.3%, the lowest level since 2008. ECB President Mario Draghi reflected his U.S. counterpart by pinpointing the risks from

protectionism. In addition to, July data showed the Eurozone's annual headline inflation rate at 2.1 per cent and the equivalent core figure at 1.1%.

With growth in the Eurozone still relatively robust, the path for the ECB to cease its bond purchases at the end of 2018 looks relatively clear, in our view. Domestic fundamentals are strong in numerous countries, most importantly Germany, and a slight lessening of trade tensions between the EU and the United States may help to reinforce sentiment among European businesses. Overall, it seems wise for the ECB to retain some flexibility over the timing of its transition to more conventional monetary policies.

This article was issued by Maria Fenech, investment manager support officer at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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