Will the US post its first quarterly GDP increase of 2022?

The US economy is expected to have grown in the third quarter of 2022 — largely helped by a shrinking trade deficit — despite forecasts for consumer spending to have weakened.

The commerce department on Thursday is expected to report that US gross domestic product grew at an annualised rate of 2 per cent in the July through September period, according to economists polled by Reuters. That is down from an unexpected 0.6 per cent decline in the second quarter and a 1.6 per cent decline in the first three months of this year.

Analysts at JPMorgan expect the growth in GDP to be attributed to “significant narrowing in the trade deficit during the quarter”. The US trade deficit shrank for the fifth consecutive month in August, as consumers spent more on services than goods and as retailers reduced overseas orders to manage excess inventories.

Although the trade deficit is expected to drive GDP growth in the third quarter, some of the underlying details of the report are expected to be negative. Troy Ludtka, senior US economist at Natixis Americas, said consumer spending and investment were expected to weaken.

In spite of projections that the economy grew in the third quarter, the US may still be on track for a recession next year, as the Federal Reserve continues to tighten monetary policy aggressively to curb inflation.

In many countries, two consecutive quarters of GDP contraction are classified as a “technical” recession. But the National Bureau of Economic Research, the government entity that determines whether the US has entered a recession, has declined to declare it as the job market remains strong.

“We’re right now basically teetering on the precipice of what could be a very major economic contraction at [the Fed’s] hands,” Ludtka said. “They are trying to make up for a mistake they made back in 2020 and 2021 with an even bigger mistake.” Alexandra White

Will the ECB raise rates by three-quarter points again?

The European Central Bank is expected to announce its second consecutive 0.75 percentage point increase in interest rates on Thursday, reaffirming its determination to tackle continued record-setting levels of eurozone inflation.

Spyros Andreopoulos, senior European economist at BNP Paribas, summed up expectations by saying the ECB was “still playing catch-up” in trying to contain inflation and it was still “too early for a dovish pivot in ECB communication”.

The probable increase in the ECB’s deposit rate to 1.5 per cent — its highest level since January 2009 — is only one of several crucial decisions awaiting its president Christine Lagarde and the 24 other members of its governing council.

Faced with eurozone inflation that reached an all-time high of 9.9 per cent in September, the central bank is looking at other levers it could pull to reduce price growth in the 19 countries that share Europe’s single currency.

The council is expected to discuss ways to start shrinking the ECB’s almost €9tn balance sheet, which has ballooned over the past decade. One is to change the rules to stop banks earning almost €25bn of risk-free profits from the €2.1tn of ultra-cheap loans the ECB provided during the pandemic, known as targeted longer-term refinancing operations.

Another is to signal plans to reduce the amount of maturing bonds it replaces in its €3.26tn asset purchase programme from early next year. Such a process, known as quantitative tightening, has already started at the US Federal Reserve and Bank of England. But given the scars left by the eurozone debt crisis a decade ago, the ECB is likely to tread carefully. Martin Arnold

Will the BoJ budge at its next monetary policy meeting?

The yen slid past ¥150 against the dollar for the first time since 1990 last week, dropping through ¥151 on Friday, while official data showed that Japan’s inflation rate rose to an eight-year high of 3 per cent in September.

The Japanese currency shot higher later in the session on Friday, touching ¥146.23 following a second intervention by Japanese authorities in a month to stem the yen’s slide.

In all, the developments once again beg the question of whether the Bank of Japan is going to do anything when its board meets for two days through October 28.

According to Masamichi Adachi, chief economist at UBS in Tokyo, the answer is “nothing”. BoJ governor Haruhiko Kuroda is expected to stand firm with its ultra-loose monetary policy and remain committed to keeping the 10-year Japanese government bond yield pinned below 25 basis points — even if that requires more emergency bond-buying operations.

“His message has been persistently decisive: Japan’s consumer price index inflation will slow to below 2 per cent next year so policy tightening is not necessary and inappropriate at this stage,” Adachi said. “We agree with this inflation outlook.”

There are few options to keep the yen from falling further as the gap widens between the BoJ’s dovish policy and the tightening demonstrated by most other major central banks.

But Japanese authorities have indicated they are ready to step in if there is too much volatility and they still have firepower even after a $20bn intervention in September and last week’s action to prop up the yen. Kana Inagaki