Take Two: China economy grows slower than expected; Eurozone inflation eases

What do you need to know?

China’s economy expanded at a slower-than-expected pace in the second quarter (Q2), at an annual rate of 6.3%, though accelerating from Q1’s 4.5%. This reflected sluggish demand as retail sales posted their weakest growth since December, slowing sharply to 3.1% in June from 12.7% in May. However, strong manufacturing activity helped drive a surprise uptick in China’s industrial production in June, which grew 4.4% compared to a year earlier from May’s 3.5%. Last week the country’s government announced plans to boost household spending, amid calls for greater stimulus to drive China’s post-pandemic recovery.

Around the world

Eurozone annual inflation was confirmed at 5.5% in June, down from 6.1% in May – the lowest since the start of 2022, but still above the European Central Bank’s (ECB) 2% target. One member of the ECB Governing Council, Klaas Knot, said he believes further monetary tightening “is a necessity” in July and “would at most be a possibility” beyond. In Japan, core inflation rose 3.3% in June from a year earlier compared to 3.2% in May, while a measure that excludes food and energy eased to 4.2% from 4.3%. Elsewhere, UK inflation fell by more than expected in the year to June, to 7.9% from 8.7% in May.

Figure in Focus: 0.3%

US production fell short of market expectations in June. Manufacturing output fell by 0.3% from a revised 0.2% decrease in May, partly reflecting a spending shift from goods to services. Industrial production was also lower than anticipated, falling 0.5% in June after the same decline the month before. Retail sales rose in June for the third consecutive month, though slower than anticipated at 0.2% from the previous month’s revised 0.5%. The data, showing US consumers are still spending amid higher interest rates and persistent inflation, may reinforce expectations that the Federal Reserve (Fed) will raise rates again when it meets this week.

Words of wisdom

Underground climate change: A simpler expression for a phenomenon known as ‘subsurface heat islands’. Both refer to the warming of the ground under our feet in major cities due to heat released by buildings, underground railways or other infrastructure. Concerns around the issue are not primarily linked to atmospheric climate change, and a study published this month of effects in Chicago identified potential damage to buildings, walls and tunnels from deformations in the soil, rocks or construction materials. Separately, a report from non-profit group Berkeley Earth said there was now an 81% chance that 2023 would be the hottest year on record after a series of heatwaves.

What's coming up

Central banks will be in the spotlight this week. The Fed meets on Wednesday – at its June meeting it kept interest rates unchanged at 5%-5.25%, a decision described as a “skip” rather than a “pause”. The ECB follows on Thursday – when it met last month it raised its key interest rate by 25 basis points to 3.5%, a 22-year high, while the Bank of Japan convenes on Friday. In terms of data updates, on Monday, Purchasing Managers’ Indices for Japan, Australia, the UK, US and Eurozone are published, while an advance estimate of US Q2 GDP growth is announced on Thursday.