Weak US and Eurozone growth complicates central bank tasks, and other economy stories you need to read this week

Weak first-quarter economic growth data from the US and Eurozone is complicating the task facing the regions' central banks as they look to tame inflation without throttling the economy.

US economic growth slowed more than expected in January-March. GDP increased at a 1.1% annualized rate, the government said in an advance estimate, down from 2.6% in the fourth quarter. An acceleration in consumer spending was offset by businesses liquidating inventories in anticipation of weaker demand later this year amid higher borrowing costs.

The 20-nation euro area economy barely expanded in the first quarter, posting 0.1% growth from the previous three months. GDP was up by 1.3% compared with a year earlier.

The Eurozone's two largest economies, Germany and France, stagnated or barely grew in January-March as a surge in exports was offset by a decline in domestic consumption by households and the government. But the Spanish and Italian economies expanded more than expected, partly thanks to that same rebound in trade.

Inflation data was also unusually hard to interpret, with increases in the headline rates in France and Spain, while most German states saw the pace of price growth slow or stabilize.

The US Federal Reserve and the European Central Bank (ECB) are expected to raise interest rates next month. The Fed is likely to pause for the remainder of the year – as we reported last week – while the ECB path is less clear.

Much of the world is still reeling from runaway inflation stoked by an energy price shock and geopolitical events. But China has the opposite problem – a risk of deflation.

Consumer prices rose by just 0.7% in March compared with a year earlier, while factory gate prices fell for the sixth month in a row. That is some way below the People's Bank of China's (PBOC's) price stability target.

In contrast, US consumer price inflation was 5% last month. In the European Union, it was 8.3% and in the United Kingdom 10.1% – all a multiple of their central banks' 2% inflation targets.

Chinese households are saving rather than spending, as they are trying to manage uncertainty over the economic outlook. Delaying or scrapping purchases means that companies are wary of maintaining or ramping up production or making new investments, raising the risk of a deflationary spiral of depressed wages and more sluggish economic growth.

"Our core view is that China’s economy is deflationary," Raymond Yeung, chief economist for Greater China at ANZ Research, wrote last week, according to CNN, soon after China released its first-quarter GDP growth figures.

Although GDP expanded 4.5% in the first quarter compared with a year earlier, that growth largely reflected the impact of pent-up demand among shoppers following three years of pandemic restrictions, Yeung added. Stripping that out, GDP growth would have been only 2.6%.

The Bank of Japan (BOJ) is maintaining ultra-low interest rates but has announced a broad review of its monetary policy, laying the groundwork for new Governor Kazuo Ueda to gradually phase out his predecessor's massive stimulus programme. The BOJ has made no changes to its yield curve control policy that sets a short-term interest rate target of -0.1% and leaves the 10-year bond yield around zero.

Long-term sickness is costing the UK economy £43 billion ($53.6 billion) a year, which equates to about 2% of GDP. This is according to a new Institute for Public Policy Research study, which is the latest research to pinpoint health as one of the factors dragging on the country's economy. The Bank of England says the UK may fail to grow in the coming year, in what would be one of the longest slumps in its history.

The world's top central banks – the ECB, BOJ and Bank of Switzerland – are cutting the frequency of their dollar liquidity operations with the US Federal Reserve from May, sending the clearest signal yet that last month's financial market volatility is essentially over. The Fed started offering dollars in daily tenders after the failure of Silicon Valley Bank, in order to avert a risk of liquidity shortages.

Retailers globally are still worried about inflation dampening consumer spending, even as the rate of price increases is easing, according to a new Boston Consulting Group survey of retail decision-makers. Retailers are contending with slowing sales as consumers, squeezed by high energy bills, spend less on clothes and buy cheaper food.

South Korea's heavily trade-reliant economy barely averted a recession in the first quarter. GDP expanded by 0.3% over the previous three-month period, with weak exports clouding the outlook despite China's reopening.

Argentina's central bank has hiked its benchmark interest rate by a huge 10 percentage points to 91%, as it tries to steady the peso and tame annual inflation of 104%. The hike is the biggest since a market meltdown in August 2019, and comes only a week after the bank lifted rates by 300 basis points to 81%.

As recession fears mount in the US, data from the National Bureau of Economic Research shows that periods of economic contractions over the last half a century have ranged from 18 months to just two months. Federal Reserve economists believe the next downturn may last longer than usual.

The US has the largest bond market in the world, valued at over $51 trillion, according to new estimates from the Bank for International Settlements Commercial banks are among the top buyers of US government debt. Rising interest rates have pushed down bond prices, leading to questions about what type of bonds banks hold.

Despite the rapid acceleration of digitalization in recent decades, productivity growth has been slow at the aggregate level across EU countries. The authors of a new study argue that while digitalization enhances highly productive firms' productivity, it has a limited impact for most companies.

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