News of the week summary - 07/30/2023

New data shows promising outlook for US Economy

In June, the United States saw a notable cooling in key inflation measures, while consumer spending showed a positive uptick, setting the stage for a promising third quarter. Data revealed that the personal consumption expenditures price index increased by 0.2% compared to May, and over the year, it rose by 3%—the slowest pace in over two years. The Core PCE Index, considered a more reliable gauge of inflation, also increased by 0.2% from the previous month and was up 4.1% from the same month in 2022.

Consumer spending, adjusted for inflation, surged by 0.4% in June, marking the most significant increase since January. In parallel, a quarterly gauge of employment costs, closely monitored by the Federal Reserve, increased at the slowest pace in two years, according to separate government data.

Despite annual inflation rates still surpassing the Fed's target, the deceleration in price and wage growth over the past year has raised hopes that the central bank can control inflation without causing economic downturn. This optimism has led to a growing number of economists reconsidering recession forecasts in the near term.

A resilient labor market remains a pillar supporting the US economy, even as financial conditions tighten and prices continue to rise. Wage gains are beginning to outpace inflation, thus alleviating the burden of higher costs. The real disposable income, a significant driver of consumer spending, increased by 0.2%, and wages and salaries, unadjusted for price changes, surged by 0.6%—the most significant advance since the beginning of the year. However, the savings rate declined to 4.3%.

Growth beats expectations in France

France's economy exceeded expectations by growing significantly faster than estimated, while inflation rates saw a decline, providing a ray of hope as concerns of a potential recession loom over the 20-nation eurozone. Boosted by a surge in exports, France's GDP rose by 0.5% between April and June, in contrast to the 0.1% expansion in the first quarter of the year. Economists had estimated growth of only 0.1%.

In July, consumer prices in France rose by 5% compared to the previous year, the lowest level since the energy crisis triggered by Russia's invasion of Ukraine. This result, while slightly below analyst expectations, signifies a positive development in the ongoing battle against inflation. In parallel, Spain's economy demonstrated resilience, with a 0.4% growth, aligning with analyst estimates. Spain also saw an unexpected acceleration in inflation, but it remains among the lowest levels in Europe.

Germany, the largest economy in Europe, remains the weakest link, with data yet to reveal whether it has exited its winter recession. Despite the European Central Bank's president, Christine Lagarde, painting a grim picture for the eurozone in the coming months, recent figures indicate positive developments. France's Finance Minister affirmed the country's growth forecast and emphasized the shift in growth drivers toward exports and business investment, away from consumer spending.

The data further indicated an increase in foreign sales, influenced by the delivery of a cruise ship, while consumer spending in France showed signs of recovery by the end of the quarter. This promising economic growth and inflation moderation provide hope for the eurozone, countering the concerns of an impending recession.

Global subsidy war accelerates

President Joe Biden's ambitious industrial policy in the United States has set off a global competition with far-reaching consequences for governments and businesses worldwide. Biden's approach aims to bolster American leadership in key industries of the future, such as clean energy and semiconductors, by providing substantial subsidies to local manufacturing.

This approach, including last year's Inflation Reduction Act, has triggered a worldwide race to invest in industries pivotal for the future. Germany is preparing to offer approximately €20 billion in subsidies for high-end chip plants. The UK got Tata Group (the biggest indian automaker) to establish a new electric vehicle battery plant on its soil through significant financial incentives.

Governments across the globe are deploying substantial public funds in various forms to support strategic industries, particularly those related to low-carbon technologies. However, the escalation of these subsidies is raising concerns about creating economic distortions and exacerbating global economic tensions.

The Biden administration justifies this policy shift by positioning it as a response to China's extensive subsidies, claiming that allies should collectively push back against Beijing's influence. While China has indeed outspent its rivals on industrial policies, economists remain divided on the wisdom of adopting similar state-led approaches, questioning governments' ability to pick winners and expressing concerns about market-driven globalization.

Ultimately, this global subsidy war creates a landscape where only those with significant resources can thrive, with potential winners and losers already emerging. The impact is visible in the form of increased manufacturing in the US, while the EU is navigating challenges related to a lack of financial leverage compared to the US and China. This new subsidy-driven world order has transformed industrial policy from a pejorative term into a cornerstone of economic strategy, sparking significant debates and raising critical questions about its long-term implications.