Shrinkage. For the first time since the introduction of the EUR, real GDP has slipped into negative territory for EMU as a whole. The statistical office reported a contraction of 0.2% q-o-q. In Germany, output in the economy as a whole even plummeted 0.5%. GDP also shrank in Italy and France. Spain was at least still able to report growth – even though only minimal (pages 4-9). Strains. Even though the contraction in spring is attributable in part to a technical reaction to the strong start to

Bail-out. Were it not for the billions in aid from the Treasury and the Fed, it is quite possible that the US financial system would have already collapsed. Nevertheless, they could not prevent the failure of individual financial institutions as well as an economic growth slowdown. Tax checks. The financial crisis combined with a weaker labor market as well as high oil prices already led to falling real compensation of employees. Without the tax rebates, private consumption would have already

Downturn. After starting the year on an unexpectedly strong note, growth in the eurozone has weakened massively. In spring, GDP throughout the EMU should have stagnated at best. That is also the message from our GDP model primarily based on hard economic data (cf. chart). Even worse, the risks are clearly tilted to the downside. Widespread. The German economy probably even contracted in the second quarter. And while gross domestic product in France and Spain posted at least slight growth, the

● Numbers. The closely-watched employment report scheduled for release next Friday should show that the US economy is still shedding jobs at a rapid pace. That at least is the message from our short-term model, based on the initial jobless claims and the employment component of the ISM Indices (pages 4-6). ● Forecast. These leading labor market indicators are, however, not really sufficient to make a medium-term payroll forecast. More suitable in this respect is the relatively new Employment

Concerns. The nascent hope of a relaxation of the credit crisis and the end of the global economic downturn has been dashed. The renewed escalation of the US credit crisis combined with warnings of growing inflation risks as well as the bad macroeconomic figures have once again fueled stagflation fears among investors. Fannie & Freddie. It was only the Fed’s and the Treasury’s intervention that averted a collapse of the two mortgage giants. But the two institutions still have to be

Growth. Italy is teetering on the brink of recession, Spain’s economy is in free fall, France is ailing, and even Germany can no longer escape the global downward pull: After the strong start into the year, German GDP is expected to have contracted this spring. And the economy will continue to merely plod along over the coming quarters (pages 2-4). Inflation. GDP growth persistently below trend EMU-wide will, however, see core inflation moderate again in the mid-term. Our output gap model

Impulses. Once again, the US economy is proving to be more “resilient“ than anticipated. At just over 1½%, we expect that GDP growth in Q2 2008 was even stronger than at the beginning of this year (+1%). The main catalyst was, however, the federal tax rebate checks (p. 5-7). Fed. This boost to purchasing power should also be felt in the current quarter. At the same time, inflationary pressures are still increasing. But the Fed cannot yet scale back its massive monetary policy stimulus as

Rate hike. When ECB Council members meet next Thursday in Frankfurt, anything but a refi rate hike by 25 bp to 4.25% would be a major surprise – stirring up markets as was already the case after Trichet’s press conference in early June (pages 4-5). One-off measure. But we expect that this is not the beginning of a rate hike cycle, although inflation will be flirting with the 4% level in the coming weeks. In fact, the economic slowdown in the eurozone will be more pronounced than is widely

● Risk . An oil price of USD 200 per barrel is within reach – over the medium term! But even in the short term, i.e. two to three quarters down the road, it is entirely possible to envision constellations that will drive the oil price in this direction – albeit only as a risk scenario. In our baseline view, we expect the pace of increase in oil prices to moderate substantially (pages 4-6). ● Recession . A surge in the price of oil to USD 200 would, however, have serious repercussions for the

US. The focus of monetary policy changed within the space of a few weeks from recession fears to inflation concerns. The numbers seem to support the new Fed stance: Instead of contracting as feared, the US economy most probably stagnated this spring. However, much more than stabilization at a low level should not be expected for coming quarters either (pages 5-8). Patience. It will, therefore, take a few more months before the Fed switches from its now neutral stance to a tightening bias,