Japan: The economy likely rebounded in Q2. The recovery’s spearhead will have been consumer spending. Most Covid-19 restrictions were removed in late March, helping to push the services PMI up to the highest level since 2013. Rising inflation may have dragged on private spending toward the end of the quarter—consumer confidence fell in June—but consumption is expected to have accelerated in Q2 overall. Less positively, the external sector likely dented growth, due to supply constraints and a slowing global economy. The trade deficit was the highest in more than eight years in the quarter, while industrial production contracted at the sharpest rate in two years in May. In politics, the prime minister’s party won a majority in elections for the upper house on 12 July, allowing him to press ahead with key policies such as increasing defense spending and reforms to boost wage growth. Growth should be stable this year, with looser Covid-19 restrictions bolstering private consumption. That said, our panelists project that the economy will remain below its pre-pandemic level at the end of 2022; a weaker external sector should cap momentum. Key risks to the outlook include rising inflation and increased supply bottlenecks. FocusEconomics panelists see the economy expanding 1.7% in 2022, which is down 0.1 percentage points from last month’s forecast, and 1.6% in 2023.
United Kingdom: The economy likely registered a muted performance in Q2 amid higher inflation, record-low consumer sentiment and tighter financial conditions. That said, recent GDP data for May surprised markets on the upside, with the economy logging 0.5% month-on-month growth. Together with an upward revision to April’s contraction in GDP, this paints a less negative-than-previously anticipated picture of economic activity in early and mid-Q2. Turning to Q3, services and manufacturing PMI data points to a loss of steam. In politics, in early July, Boris Johnson resigned as the Conservative Party leader, and announced he will step down as prime minister after a new Conservative leader is chosen on 5 September. Ex- Chancellor Rishi Sunak and Foreign Secretary Liz Truss are the final two candidates, with Sunak prioritizing fiscal restraint if elected and Truss promising immediate tax cuts. This year, growth will weaken notably due to multi-decade high inflation and higher interest rates. Upside inflation shocks and faster-than- expected rate hikes pose downside risks, while extra fiscal stimulus is an upside risk. Tensions over Northern Ireland, which could result in the suspension of the Brexit trade deal or the imposition of EU tariffs, cloud the outlook. FocusEconomics panelists expect the economy to expand 3.4% in 2022, which is down 0.1 percentage points from last month’s forecast, and 0.8% in 2023.
United States: The economy is forecast to have returned to growth in Q2 as the contributions from net exports, government spending and inventories improved. Moreover, underlying domestic activity appeared fairly robust in the face of rising inflation and interest rates. Monthly job gains beat market expectations throughout the quarter, with growth particularly strong in contact-intensive sectors which had previously been impacted by Covid-19. Meanwhile, retail sales posted strong gains in April and June, likely aided by accumulated savings and notwithstanding lower consumer confidence. In addition, the composite PMI averaged only slightly below its Q1 level in Q2. However, momentum appeared to weaken at the outset of Q3, with the Composite PMI—which covers both the manufacturing and services sectors—dipping into contractionary territory in July. Growth will weaken in 2022 from 2021 on aggressive Fed hikes, and panelists have now downgraded their 2022 growth forecast by 1.5 percentage points since the start of the year. That said, the robust labor market and strong energy exports will provide support. A continued rise in inflation and faster-than-expected Fed tightening are key risks to the outlook. FocusEconomics panelists see GDP growing 2.3% in 2022, which is down 0.3 percentage points from the previous month’s forecast. In 2023, our panel sees the economy expanding 1.3%.
Switzerland: Economic growth accelerated in Q1 from Q4, amid faster expansions in private and government consumption. In contrast, fixed investment declined due to lower investment in equipment and construction, while export and import growth slowed. Turning to Q2, the economy likely lost steam. Both the manufacturing and services PMIs, as well as the KOF Barometer, averaged lower in Q2 relative to Q1. That said, all three indicators still pointed to an ongoing expansion in activity. Moreover, unemployment fell to an over two-decade low in June, and all Covid-19 restrictions were lifted in the quarter. Plus, inflation was close to a third of the euro area average in Q2. These factors should have propped up household spending, notwithstanding weaker consumer sentiment. GDP growth will slow this year on milder expansions in exports and government spending. However, lower unemployment and the removal of all pandemic-related restrictions will keep overall growth above its long-term potential. Interest rate hikes and the gradual weakening of trade links with the EU in the absence of a revamped trade deal cloud the outlook. FocusEconomics Consensus Forecast panelists project the economy to expand 2.5% in 2022, which is unchanged from the previous month’s forecast, and 1.4% in 2023.
Euro Area: The economy likely lost steam in Q2. Shrinking retail sales in sequential terms in April–May, and falling consumer confidence amid soaring inflation throughout the quarter, mean household spending was likely subdued. Moreover, weaker business confidence and lower manufacturing PMI prints suggest that soaring input and logistics prices, coupled with supply shortages, hit the secondary sector. That said, some support to growth will have come from a falling unemployment rate and recovering tourism sectors in Mediterranean countries. In other news, on 21 July flows of Russian gas via the Nord Stream I pipeline resumed, but at reduced volumes. Meanwhile, EU countries reached an agreement to reduce gas demand by 15% this winter to face possible supply cuts from Russia. In politics, Italy’s government fell on 21 July, with new elections due for 25 September. The prime minister will carry on in a caretaker role until then. GDP will expand at a milder pace this year. Depressed confidence, supply chain disruptions, higher commodity prices and rising interest rates will limit growth. That said, a recovering tourism sector, lower unemployment and EU funds disbursements should support activity. Financial instability risks stemming from high public debts and gas rationing cloud the outlook. The economy is seen expanding 2.6% in 2022, which is unchanged from last month’s forecast. In 2023, GDP is seen increasing 1.5%.
(c) FocusEconomics 2022
ISSN 2013-648X
