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Europe's prospects brighten as U.S. fades
July 25, 2010 / 7:02 PM / 7 years ago

Europe's prospects brighten as U.S. fades

<p>Pedestrians walk past the headquarters of Commerzbank in Frankfurt July 23, 2010. REUTERS/Ralph Orlowski</p>

WASHINGTON (Reuters) - What’s odd about this scenario?

German business confidence is soaring while U.S. consumer sentiment sinks.

Britain’s second-quarter economic growth was almost twice as fast as expected, the strongest in four years.

Meanwhile, economists have steadily marked down forecasts for Friday’s U.S. gross domestic product report.

What happened to Europe being the weak link in the global economic recovery?

Whatever the explanation and despite the divergence, there are signs that both regions will cool down in the second half of the year.

The U.S. “economy entered the second quarter with plenty of momentum but exited with very little,” said IHS Global Insight economist Brian Bethune.

Economists polled by Reuters think U.S. growth slowed to a 2.5 percent annual rate in the second quarter, down from 2.7 percent in the first quarter and 5.6 percent in the final quarter of last year.

Britain’s second-quarter growth was closer to 4.4 percent at an annualized rate.

Dig beneath the headline and the contrast between the United States and Britain looks even sharper. Nearly all the growth in the British economy came from the private sector, led by construction and services. (For a graphic on U.S. and British GDP, see link.reuters. com/bup39m)

Friday’s U.S. GDP report is likely to show a hefty contribution from government spending and a slowdown in consumer spending.

The Commerce Department will also release its annual revisions to the national accounts back to 2007, and Bethune’s firm thinks the tweaks will show the recession was even deeper than thought, leaving a bigger hole to fill.

The same day Britain released its robust growth reading, the Ifo economic think tank reported German business sentiment jumped by a record margin in July to reach its highest level in three years. German consumer sentiment figures are due on Tuesday, and are expected to hold steady.

In contrast, U.S. consumer confidence fell sharply in July.

WHAT NEXT?

The European strength has added a new wrinkle to the transatlantic debate over whether governments ought to rein in spending now or wait until the recovery is more firmly established.

European Central Bank President Jean-Claude Trichet said on Friday it was time to start belt-tightening. But the United States warned Europe that an overly hasty exit could undermine the global economic recovery.

“The European recovery is at risk because of increased uncertainty while government stimulus is withdrawn, and a further slowdown in Europe would pose problems for the rest of the world whose exports to Europe may be reduced,” the White House said in a midsession budget review.

The looming fiscal pullback is one reason why Global Insight thinks the second quarter will be as good as it gets for the British economy “for some time to come.”

Even those German confidence figures may come back down to earth because they were partly due to World Cup fever.

In the United States, the second half of the year looks weaker because government spending programs are winding down, businesses have already replenished inventories and a tax credit that boosted housing demand expired.

“In the absence of further monetary or fiscal juice, it is difficult to see the economy growing much faster than its long-run potential of about 2-1/2 percent in the year ahead as households focus on repairing tattered finances,” said Sal Guatieri, an economist with BMO Capital Markets in Toronto.

Editing by Dan Grebler

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