The European Commission trimmed its growth forecast for the euro area this year to 2.1 per cent, downwards from the previous 2.3 per cent projection. Growth of two per cent is now expected for next year.

Economic momentum moderated in the first half of 2018 after five straight quarters of vigorous expansion. This slight downward revision compared to spring reflects the impact on confidence of trade tensions and policy uncertainty, as well as rising energy prices. However, the EU Commission expects that growth momentum will strengthen somewhat in the second half of 2018, as labour market conditions improve, household debt declines, consumer confidence remains high and monetary policy remains supportive.

Inflation is forecast to average 1.7 per cent both this year and next. This represents an increase of 0.2 percentage points for 2018 and 0.1 percentage point for 2019 since spring.

The first-ever new monthly UK GDP estimate revealed that gross domestic product rose 0.3 per cent month-on-month in May after 0.2 per cent increase in April and a flat reading in March. Services grew 0.3 per cent, while production continued to decline, down 0.4 per cent. In the more reliable three-month comparison, GDP rose 0.2 per cent in the quarter to May after a flat outcome in the three months to April period.

These GDP estimates shows a mixed picture of the UK economy, with modest growth driven by the services sector, partly offset by falling construction and industrial output. Services performed strongly in the three months to May while house-building and manufacturing both contracted. Services, in particular, grew robustly in May as retailers enjoyed a double boost from the warm weather and the royal wedding. Industrial production decreased by 0.4 per cent for the third straight month in May.

Given the overall economic and inflationary momentum, it is expected that the Bank of England will to continue to raise interest rates gradually, provided that political developments do not cause the economic outlook to deteriorate.

US producer prices increased slightly more than expected in June, with the annual rate of price growth accelerating to its highest level in over six years.

The US producer price index for final demand rose 0.3 per cent in June after climbing by 0.5 per cent in May. The report said energy prices increased by 0.8 per cent in June after spiking by 4.6 per cent in May, while food prices slumped by 1.1 per cent after inching up by 0.1 per cent the previous month.

Excluding volatile food and energy prices, core producer prices also climbed by 0.3 per cent in June, matching the increase seen in May. Compared to a year ago, producer prices were up by 3.4 per cent in June, representing the largest 12-month increase since a 3.7 per cent jump in November 2011. The annual rate of growth in core producer prices also accelerated to 2.8 per cent in June from 2.4 per cent in May.

The increase in producer price inflation to a fresh six-year high in June was driven by another big rise in services’ prices, indicating that the tightening labour market is behind inflationary pressures. There are also indications that the new import tariffs on steel and aluminium will begin to push up firms’ input costs, eventually trickling down to higher consumer prices.

This report was compiled by Bank of Valletta for general information purposes only.

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