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Weak US and Eurozone growth complicates central bank tasks, and other economy stories you need to read this week

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People cross a street in a business district in central Tokyo, Japan, December 8, 2015. Japan's economy dodged recession in the third quarter with the initial estimate of a contraction revised to an annualised expansion of 1.0 percent, offering a glimmer of hope for policymakers struggling to end years of stagnation.  REUTERS/Thomas Peter

Consumer spending and confidence are key to US and Eurozone growth outlooks. Image: REUTERS/Thomas Peter

Gabi Thesing
Senior Writer, Forum Agenda
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  • This weekly round-up brings you the latest stories from the world of economics and finance.
  • Top economy stories: Weak first-quarter growth in US and Eurozone muddies water for central banks; Deflation risks in China; Bank of Japan announces broad monetary policy review.

1. Weak first-quarter growth in US and Eurozone muddies water for central banks

Weak first-quarter economic growth data from the US and Eurozone is complicating the task facing the regions' central banks as they look to tame inflation without throttling the economy.

US economic growth slowed more than expected in January-March. GDP increased at a 1.1% annualized rate, the government said in an advance estimate, down from 2.6% in the fourth quarter. An acceleration in consumer spending was offset by businesses liquidating inventories in anticipation of weaker demand later this year amid higher borrowing costs.

GDP breakdown
An acceleration in US consumer spending in the first quarter was offset by businesses liquidating inventories. Image: Reuters/Refinitiv Datastream

The Eurozone's two largest economies, Germany and France, stagnated or barely grew in January-March as a surge in exports was offset by a decline in domestic consumption by households and the government. But the Spanish and Italian economies expanded more than expected, partly thanks to that same rebound in trade.

GDP growth rates over the previous quarters
The Eurozone economy expanded by just 0.1% in the first quarter compared with the previous three months. Image: Eurostat

Inflation data was also unusually hard to interpret, with increases in the headline rates in France and Spain, while most German states saw the pace of price growth slow or stabilize.

The US Federal Reserve and the European Central Bank (ECB) are expected to raise interest rates next month. The Fed is likely to pause for the remainder of the year – as we reported last week – while the ECB path is less clear.

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2. Deflation spectre stalks Chinese economy

Much of the world is still reeling from runaway inflation stoked by an energy price shock and geopolitical events. But China has the opposite problem – a risk of deflation.

Consumer prices rose by just 0.7% in March compared with a year earlier, while factory gate prices fell for the sixth month in a row. That is some way below the People's Bank of China's (PBOC's) price stability target.

In contrast, US consumer price inflation was 5% last month. In the European Union, it was 8.3% and in the United Kingdom 10.1% – all a multiple of their central banks' 2% inflation targets.

Chinese households are saving rather than spending, as they are trying to manage uncertainty over the economic outlook. Delaying or scrapping purchases means that companies are wary of maintaining or ramping up production or making new investments, raising the risk of a deflationary spiral of depressed wages and more sluggish economic growth.

China's youth jobless rate near record high
China's youth unemployment has accelerated to near record levels as the economic outlook dims. Image: Reuters Graphics

"Our core view is that China’s economy is deflationary," Raymond Yeung, chief economist for Greater China at ANZ Research, wrote last week, according to CNN, soon after China released its first-quarter GDP growth figures.

Although GDP expanded 4.5% in the first quarter compared with a year earlier, that growth largely reflected the impact of pent-up demand among shoppers following three years of pandemic restrictions, Yeung added. Stripping that out, GDP growth would have been only 2.6%.

3. News in brief: Stories on the economy from around the world

The Bank of Japan (BOJ) is maintaining ultra-low interest rates but has announced a broad review of its monetary policy, laying the groundwork for new Governor Kazuo Ueda to gradually phase out his predecessor's massive stimulus programme. The BOJ has made no changes to its yield curve control policy that sets a short-term interest rate target of -0.1% and leaves the 10-year bond yield around zero.

Long-term sickness is costing the UK economy £43 billion ($53.6 billion) a year, which equates to about 2% of GDP. This is according to a new Institute for Public Policy Research study, which is the latest research to pinpoint health as one of the factors dragging on the country's economy. The Bank of England says the UK may fail to grow in the coming year, in what would be one of the longest slumps in its history.

The world's top central banks – the ECB, BOJ and Bank of Switzerland – are cutting the frequency of their dollar liquidity operations with the US Federal Reserve from May, sending the clearest signal yet that last month's financial market volatility is essentially over. The Fed started offering dollars in daily tenders after the failure of Silicon Valley Bank, in order to avert a risk of liquidity shortages.

Retailers globally are still worried about inflation dampening consumer spending, even as the rate of price increases is easing, according to a new Boston Consulting Group survey of retail decision-makers. Retailers are contending with slowing sales as consumers, squeezed by high energy bills, spend less on clothes and buy cheaper food.

South Korea's heavily trade-reliant economy barely averted a recession in the first quarter. GDP expanded by 0.3% over the previous three-month period, with weak exports clouding the outlook despite China's reopening.

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Contents
1. Weak first-quarter growth in US and Eurozone muddies water for central banks 2. Deflation spectre stalks Chinese economy 3. News in brief: Stories on the economy from around the world4. More on finance and the economy on Agenda

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