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The US economy shrank in the second quarter, for the second time in a row. According to popular opinion, the American economy is in recession. Whether this is really the case from an economic point of view is debatable - especially because the first quarter's decline was almost exclusively caused by a significant drop in exports, while domestic demand remained quite robust. The National Bureau of Economic Research will decide this dispute sometime next year. In any case, something else is important for assessing the current situation. The US economy has lost momentum so far this year: While consumption and investment still contributed 0.5 percentage points to economic growth in the first quarter, this value tipped into negative territory in the second quarter with 0.1 percentage points.
The reason is clear: the tightening of monetary policy by the US Federal Reserve is now having the intended and necessary effect on inflation. For the reduction of exorbitantly high inflation rates towards the 2 percent target it is important that companies in the face of weaker demand can no longer easily pass on their increased costs to their customers and consequently also grant their employees lower wage increases. For the time being, however, prices and thus inflation rates in the USA continue to rise. Rental costs have recently made a significant contribution to this, which is not surprising in view of further increases in house prices. With the real estate market weakening overall, however, this development should soon come to an end.
The Fed, which had misjudged the inflation trend for a long time last year, has been gradually correcting its position since autumn 2021 and since spring 2022 at the latest has been putting its actions entirely at the service of fighting inflation. It accepted and still accepts negative rates of change in GDP and trusts that the lack of serious macroeconomic imbalances will limit the extent of the economic downturn. By the end of the year, the Fed has announced further interest rate hikes totalling 75 basis points, although in all likelihood economic development in the USA will remain very weak and possibly even negative in the second half of 2022.
The ECB could learn from the Fed, because inflation rates are also exorbitantly high in the euro area, and the ECB is even primarily committed to the goal of price level stability (while the Fed also still has its eye on the labour market). Although the ECB took its first interest rate step in July (much too late), it deliberately left its further course of action open. Instead, it wants to decide from meeting to meeting "depending on the data" whether and to what extent it will raise interest rates. Since the miracle of a sudden fall in inflation will not happen in the euro area either, it is completely unclear which data should prevent the ECB from fulfilling its task with further interest rate hikes. It would therefore be better to follow the Fed's example of a clear line and communicate it in such a way that companies and consumers can adjust to it.
Member of the Management Board
Head of Press & Communications
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