Do not fear a weaker euro, but do not expect too much either - US growth: good news and bad…

- United States "Business surveys are signalling a slowdown in the US economic recovery as the second half of the year gets underway. We believe this is less a sign that a "double-dip” recession is imminent than it is of the inventory cycle's diminishing contribution to growth. The combination of slower growth, lower inflation and turmoil in financial markets in the wake of the sovereign debt crisis, will no doubt encourage the Federal Reserve to maintain its extremely accommodative monetary policy well into next year."
- Japan "Growth slowed significantly in Q2 to 0.5%, as exports and consumption lost some of their dynamism. Monetary policy is expected to remain extremely loose, while fiscal policy could be progressively tightened. The economy is expected to grow by around 3.5% in 2010 and 2% in 2011. Deflation is expected to end in the second half of 2011."
- Eurozone "Driven by the ongoing rebound in the industrial sector, GDP growth probably increased in Q2 after rising only 0.2% q/q in Q1. However the pace of economic activity could slow thereafter as persistently tough labour market conditions and fiscal consolidation measures adopted by several countries put a significant strain on domestic demand. Exports will remain the main growth engine. With low inflationary pressures and a fragile recovery, the ECB will be in no hurry to raise the refi rate before 2012."
- Germany "Exports will continue to support growth over the next few quarters, as Germany benefits from the recovery of investment spending in China and the United States. The euro's depreciation againstthe dollar is also increasing the country's price-competitiveness. The strength of exports shouldtherefore partially compensate for weak domestic demand."
- France "Activity very probably rebounded in the spring despite the ongoing contraction in household spending, particularly car purchases. The spike in inflation is nearly at and end and the stabilisation in the unemployment rate since the beginning of the year suggests that the labour market continues to improve. However, domestic demand remains weak against a backdrop of growing concern as to the scale of the fiscal consolidation scheduled for next year. The Finance Act for 2011, currently being drafted, aims to reduce the fiscal deficit to 6% of GDP next year."
- Italy "The recovery from recession continues to be quite moderate and export-led for Italy. From Q3 2009 to Q1 2010 the GDP has regained just one tenth of the previous fall. The implementation of austerity measures – decided in the wake of the Greek debt crisis- will further stress the priority of sound stability versus quicker economic expansion."
- Spain "After growing slightly in the first half of 2010, GDP is expected to contract again in the second half under the impact of the Spanish government’s new austerity measures. These will probably further depress domestic demand, already dampened by the slow elimination of the main imbalances - high indebtedness among private economic agents, exorbitant size of the
construction sector and bursting of the property market bubble. Spain could therefore slip back
into recession. Against this backdrop, investors will be focusing their attention on public finances
and the situation in the banking sector."
- United Kingdom "The acceleration of GDP growth in the second quarter is likely to be short lived. The new Cameron government's programme to consolidate public finances, the likes of which haven’t been seen since the second world war, is likely to weigh on economic activity as of next year. Sterling’s past depreciation and the likelihood of continued accommodative monetary policy from the Bank of England will not compensate for fiscal austerity’s negative impact on growth. We expect GDP growth to slow from 1.5% this year to around 1% in 2011."
- China "China’s economic growth is showing signs of deceleration driven by domestic investment. It is projected to slow gradually in 2Q-4Q10, down from +12% year-on-year in 1Q10, and reach 10% for the whole of this year. In recent months, the authorities have implemented quantitative and administrative measures aimed at curbing mortgage and total lending growth and limiting investment projects of state enterprises and local governments. This has succeeded in bringing credit growth apparently under control and reducing state investment growth. Moreover, a correction seems to begin in the property market and inflation expectations are moderating. Moreover, on June 19th, China ended its currency peg to the USD and returned to a managed float exchange rate regime. Due to renewed uncertainties over global prospects and slowing domestic demand growth, the authorities are unlikely to let the yuan appreciate much or tighten further their economic policy stance in the very short term."
BNPParibas Economic Market Monitor July2010

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