Weekly Winzer: Growth rates above expectations

What do industrial production in Taiwan and inflation in the US have in common? The impact of the tariff increases in the US on both indicators has so far been less severe than expected. In Asia in particular, the expectation of higher US tariffs has had a positive impact on industrial production. However, the widely expected dip in growth following this pull-forward effect is not yet visible or only slightly pronounced. This applies in particular to the strong upward trend in production in Taiwan. The boom in the field of artificial intelligence is also clearly visible here.

On the inflation side, most indicators for the underlying trend in the US are at 3+ rather than 2+. This trend is not satisfactory because it is not compatible with the Federal Reserve’s inflation target of 2%. However, the rise in goods prices due to tariff increases has so far been rather low. This means that the effect of tariffs on purchasing power has so far been less than expected.

In the second quarter, private consumption rose by 1.6% compared to the previous quarter and on an annualized basis. Consumer growth has therefore slowed considerably. The third estimate for gross domestic product growth in the second quarter will be published on September 25. The expectation is an unchanged value of 3.3% annualized. In the fourth quarter of 2024, consumption was still booming at an annualized rate of 4%. However, the Atlanta Fed’s estimate for the third quarter of 2025 still forecasts a solid growth contribution from private consumption (1.8 percentage points) to overall economic growth. The current forecast here is an annualized 3.3%.

Growth also better than expected globally

Growth data has therefore developed better than expected since the beginning of the year. This statement can also be made for global growth. Citigroup’s surprise index for economic growth has been in positive territory since mid-January. In line with this, inflation-adjusted economic growth in the OECD region as a whole was 1.8% year-on-year in the second quarter. Real economic growth for the G20 – a good estimate for global growth – was 3.5% year-on-year in the second quarter. The average since 2005 is even slightly lower at 3.4%.

In addition to the upcoming production data from Asia and the consumption and inflation report in the USA, the preliminary purchasing managers’ indices for September and the US labor market data will also help to assess whether the downside risks to economic growth are increasing.

The world’s most important central bank, the Fed, also issued a similar assessment last week. In the published Summary of Economic Projections (SEP), the estimate for real GDP growth was revised upwards compared to last June, the estimate for the unemployment rate was revised downwards and the estimate for inflation was adjusted slightly upwards.

Further US interest rate cuts could follow

The widely anticipated quarter-point cut in the key-lending rate to a new range of 4% to 4.25% appears to be at odds with economic forecasts only at first glance. At the press conference, Fed Chairman Powell justified the interest rate decision not with forecasts, but with the change in risks. Specifically, the already weak employment growth may have fallen below the level needed to keep the unemployment rate stable. At the same time, the average opinion of the 19-member Open Market Committee – 12 of whom are voting members – indicates a faster reduction in the key-lending rate to an economically neutral level of 3% than was the Committee’s stance in June.

The wide range of opinions expressed on future key-lending rates is noteworthy. One member indicated a rate of less than 3% for the end of 2025. This was probably Stephen Miran, Chairman of the White House Council of Economic Advisers, who has suspended his position for the duration of his membership of the central bank. Last Wednesday, he was the only one to vote for a 0.5% interest rate cut. At the other end of the spectrum, seven FOMC members expressed their opinion that the key-lending rate should remain unchanged.

Numerous speeches by Fed members are scheduled for the coming days, including Powell and Miran, which will illustrate the broad spectrum of opinions within the Open Market Committee.

Conclusion

For the financial markets, the combination of better-than-expected economic data and the Fed’s change in monetary policy stance from hawkish to dovish is a favorable development in the short term. This tends to support both US equity and bond prices. The yield premium for US corporate credit risk with a high credit quality (investment grade) reached its lowest level in decades last Friday. In general, the artificial intelligence boom is driving equities, while the Fed is addressing downside labor market risks. For the US dollar, the Fed’s loose monetary policy means increasing pressure for further weakening.

However, as mentioned last week, numerous downside risks remain. For example, it could turn out that the Fed has cut interest rates too late. The labor market could cool down abruptly and trigger a recession – which would of course be negative for the stock market. Or the growth-dampening effects of the US tariff hikes could become apparent in the coming months. In addition, the Fed’s reasoning could start to falter. If the view prevails that key interest rates are being lowered primarily due to enormous political pressure, long-term inflation expectations could rise – which would be negative for bonds. However, despite the numerous and increasing risks, both the markets and the economy have proven to be surprisingly resilient.

 

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