Brave New World

What just happened?

US

• Big Tech released mostly positive earnings updates.
• The Federal Reserve (the Fed) raised interest rates by a quarter of a percentage point.
• The US economy grew more than expected last quarter.

Europe

• Business activity in the eurozone took another dip in July.
• The European Central Bank (ECB) delivered its ninth consecutive rate hike.

Asia

• The Chinese government pledged to revive growth in the world’s second-biggest economy.

What does all this mean?

Shares in Alphabet jumped after Google’s parent reported second-quarter revenue that topped analysts’ expectations. That’s mainly thanks to hearty advertising on the company’s flagship search business, which is successfully navigating a marketing slowdown and fending off emerging competition from AI chatbots.

Meta also reported strong results for the second quarter and gave an optimistic outlook for the current one, spurred on by the firm’s short-form video feature, Reels, becoming more popular with users and advertisers alike. The social media company’s shares bumped up after the news.

Meanwhile, though, Microsoft reported lukewarm second-quarter sales growth and predicted that its crucial cloud business, Azure, would keep slowing down. That overshadowed the excitement about customer interest in the firm’s new AI-powered products, sending its shares lower.

The Fed resumed rate hikes last week following a short pause in June, raising its benchmark federal funds rate by a quarter of a percentage point to a target range of 5.25% to 5.50%. That’s the highest level in 22 years, and the US central bank left the door open for a further hike at its next meeting in September.

Still, the Fed kindled hopes that the US economy could avoid a recession. And it could be right: data out last week showed the world’s biggest economy grew at a 2.4% annualized rate during the second quarter. That marked a rebound from the 2% seen in the first three months of the year, and was well above the 1.8% economists predicted.

The eurozone’s downturn deepened even further at the start of the third quarter. The purchasing managers’ index (PMI) – a measure of business activity in the bloc – fell to an eight-month low, after a sharper-than-expected slowdown in services and a decline in manufacturing that was steeper in July than the month before.

But that didn’t stop the ECB from going ahead with a widely expected quarter-point rate hike last week. That pulled the central bank’s deposit rate up to 3.75%, matching a record last reached in 2001 when it was trying to prop up the value of the newly launched euro.

Finally, the Chinese government pledged a raft of measures designed to perk up the economy last week. The all-important property market was right at the top of the agenda, along with local government debt issues, rising youth unemployment, and weak domestic demand.

This week’s focus: Global growth

The US economy is showing surprising resilience in the face of the Fed’s most aggressive rate-hiking campaign in decades. And while forecasters are still split on the odds of a recession, the combination of a strong labor market, resilient consumer spending, and easing inflation has fueled hopes that the world’s biggest economy will avoid a downturn.

It’s not just the US economy that’s holding up: according to the International Monetary Fund’s (IMF’s) latest outlook, the global economy will expand by 3% in 2023 – 0.2 percentage points higher than the fund predicted three months ago. That said, the figure would drop below both last year's growth of 3.5% and historical averages. After all, the global economy experienced an average annual growth rate of 3.8% during the two decades before the Covid-19 pandemic. And it seems unlikely that we’ll relive the good old days anytime soon: the IMF anticipates that growth will stay sluggish over the next five years, partially due to subpar improvements in productivity.

The week ahead

• Monday: Eurozone economic growth (Q2), Japan retail sales (June).
• Tuesday: Japan unemployment rate (June), Reserve Bank of Australia interest rate decision, eurozone unemployment rate (June). Earnings: Caterpillar, Pfizer, AMD, Starbucks, Uber Technologies.
• Wednesday: Earnings: Kraft Heinz, PayPal, Qualcomm, Shopify.
• Thursday: Bank of England interest rate announcement. Earnings: Moderna, Airbnb, Amazon, Apple, Block, Coinbase.
• Friday: US labor market report (June), eurozone retail sales (June).