The global economy at mid-year: So far, so good; But watch out for these three derailers in the second half

Outside the US, GDP growth in the first quarter generally exceeded expectations in the European Union, the UK, and emerging economies, including China. After the surge in imports that preceded the US tariff hike, the backlash in the second quarter will be more limited than expected in most cases. However, it would be premature to sound the all-clear, as three dangers loom: tariffs, inflation, and public debt.

The patient is holding up better than expected so far

Outside of the US, where it contracted, Q1 GDP growth generally exceeded expectations — in the EU’s case by a wide margin, with a quarter-on quarter pace of 0.6% vs 0.2% forecast by the ECB in March. UK growth surprised on the upside as well. Emerging markets proved surprisingly resilient too: China’s growth beat expectations at 5.4% year-over-year and growth surprises were generally positive across the board. Following the Q1 surge in exports to the US to front-run tariffs, a large payback in Q2 has been expected, but the data available so far — notably PMI surveys, exports and industrial production — suggest it will be limited in most cases. (The UK stands out with a contraction in activity recorded in both May and June, and France indicators have been lagging behind the rest of the Eurozone). Even China, epicenter of the trade war, saw its exports continue to grow strongly, allowing Q2 GDP to decelerate only slightly to 5.2% yoy. In line with activity, labour markets have remained strong, with unemployment rates at or near historical lows in most regions.

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