The United States performed far better than expected in the second quarter of 2023. The Federal Reserve will have more reasons to keep raising interest rates.
American GDP growth flies above expectations for the second quarter of 2023, giving strong signs of a resilient economy. GDP growth is closely watched by the Federal Reserve, which yesterday implemented its 11th rate hike since March 2022.
US Gross Domestic Product (GDP) for the second quarter grew by 2.4%, exceeding analysts’ expectations of 1.7%. In the first 2023 quarter, GDP performed worse than expected with 2% growth.
Data shows consumers preferred spending on services, particularly housing, healthcare, and finance, rather than products. In fact, manufacturing consumption rose 1.6% annually in Q2, compared to 4.2% in Q1.
However, increased housing spending is caused by steeper mortgage rates rather than real estate investments. Residential investment declined by 4.2% year-on-year.
The Federal Reserveraised rates again at their July meeting, bringing them to 5.5%, the highest level since 2001. Fed Chairman Jerome Powell expressed relief at the economy’s resilience, allowing them to possibly keep raising interest rates.
Powell did not foresee an immediate halt to rate hikes, preferring to fight inflation first. Core consumer prices are at 4.87% in the United States, far from the Fed’s 2% target.
On the other hand, inflation has been dropping more than expected in 2023, leading to a pause in rate hikes last June. Markets hope that rates will remain stable for the foreseeable future, with initial rate cuts in early 2024.
Global outlook
The United States is the richest and most important economy on Earth. A recession in the US could lead to global financial contraction.
However, despite the American GDP performing better than expected, other crucial economic areas are not sharing similar successes. The Eurozone fell into recession in June, and China keeps releasing disappointing macroeconomic data. The United Kingdom is gripped by high headline inflation.
In general, Europe will experience a long stagnation period due to the energy war against Russia and stagnating industries. European markets rejoiced that they avoided a cold winter but did not forecast a long period of economic downturn.
On Thursday, one day after the Federal Reserve, the European Central Bank predictably raised rates by another 0.25%. Contrary to Jerome Powell, ECB Governor Christine Lagarde is not even going to consider slashing rates for at least one year.
In China, decreased exports and weak production output signal a turn in Beijing’s foreign policy. 2023 will be remembered as "the year of escalation" between the United States and China.
As the US continues to escalate its trade war, China remains behind technologically and economically. And so does Europe.
