World

The US economy contracted for a second straight quarter between April and June, government data showed Thursday, adding fuel to recession fears in a headache for President Joe Biden ahead of midterm elections.

Gross domestic product declined at an annual rate of 0.9 percent in the second quarter, following a bigger drop in the first three months of the year, according to the Commerce Department.

While not the official definition, two quarters of negative growth is commonly viewed as a strong signal that a recession is underway, and a downturn in the world’s largest economy would have global consequences, as well as domestic political costs.

Biden insisted that the US economy is “on the right path,” despite the slowdown, but his critics are sure to seize on the report as proof of the veteran Democrat’s mismanagement.

After a 1.6 percent decline in the first three months of the year, the report said the slowdown in the latest quarter was largely due to drops in government spending at all levels and in private investment on goods, including autos, and on residential buildings, despite an increase in exports.

But personal consumption expenditures (PCE) continued to increase, though at a slower rate than the prior quarter, the data showed.

The US economy also continues to battle sky-high inflation, as a result of supply chain snarls due to Covid lockdowns, as well as the fallout from Russia’s war in Ukraine which has sent food and fuel prices soaring.

Consumer prices topped nine percent in June, the highest in more than four decades, while the GDP data showed another key inflation measure, the PCE price index, rose a still-high 7.1 percent in the latest three months, the same as in the January-March period.

The US central bank has been raising interest rates aggressively — with the latest big hike on Wednesday — to try to cool the economy and tamp down price pressures.

“It’s no surprise that the economy is slowing down as the Federal Reserve acts to bring down inflation,” Biden said in a statement shortly after the GDP report was released. 

“But even as we face historic global challenges, we are on the right path and we will come through this transition stronger and more secure,” he said, noting the US “job market remains historically strong” and the economy created more than a million jobs in the past three months.

– Recession debate –

It would be highly unusual for an economy still adding jobs at a rapid pace and with near record-low unemployment, to fall into recession, but even so many economists say the discussion of a downturn is more a matter of when, not if.

That poses a major political headache for the president, who has seen his approval ratings plummet in recent months as American families struggle to make ends meet due to surging inflation.

Fed Chair Jerome Powell agreed with Biden and other economists who say the GDP figures are inconsistent with other strong data.

Powell on Wednesday said he does not think the country is currently in a recession because “there are too many areas of the economy that are performing too well.”

Mike Fratantoni, chief economist of the Mortgage Bankers Association, was among those who echoed Powell’s view, saying “the ongoing strength in the job market and other signs of growth make it unlikely that this will be categorized as a recession.”

Powell also said it is possible to cool price pressures without causing a downturn or a big jump in joblessness, although he acknowledged the path to thread that needle is narrowing.

But economist Mohamed El-Erian said on Twitter that the data point to “Deepening stagflation and flashing red recession risk.”

That impression may be the one that sticks in the minds of investors and consumers.

Wall Street was not happy with the data. After big jumps in the wake of the Fed rate hike, all three major stock indices were lower in mid-morning trading.

Hundreds of internally displaced Afghans who had taken refuge in the capital left for their homes in the country’s eastern provinces Thursday, almost a year after the war that forced them to flee ended.

Millions migrated inside Afghanistan over two decades of bitter fighting during the US-led military occupation, which ended as the Taliban returned to power last August.

Many flocked to major cities such as Kabul where air strikes, bombings and firefights were less common than in rural Afghanistan, which has historically been the hardline Islamists’ power base.

On Thursday, the United Nations refugee agency UNHCR facilitated the return of some 1,600 Afghans who were living in Kabul to their homes in provinces to the east.

“It’s a delightful day, we’re returning to our houses and our homelands,” said Sardar Wali, 45, a farmer from Laghman province who fled to Kabul months before the Taliban stormed back to power.

“Even if our house was hit by mortars and has been damaged we will build it again,” he told AFP.

More than 30 buses were chartered to transport men, women and children back to their homes, while each family was gifted $200 to buy food and other essentials, the UNHCR said.

Many who took refuge in Kabul lived in makeshift tents or out in the open, while others moved into rented homes only to realise they could not afford the expense.

“It was just two to three months back that we rented a house,” said Pari Gul, who also opted to return to her home under Thursday’s UN-backed programme.

“Our children are collecting plastics and my husband is old. We can’t afford the cost of living here.”

Afghanistan’s economy is in ruins, with tens of thousands of people losing their jobs after the international community halted aid to the country in the wake of the US withdrawal.

An estimated 3.5 million people are still “internally displaced”, according to the UNHCR.

“Everyone loves to live in their own village,” said Huma, 36, as she waited in a queue to take her cash allowance.

“We are leaving thinking that at least we will be headed home.”

China’s minister for industry and information technology is being investigated for alleged corruption, state media reported Thursday, the latest senior cadre to be snared by Beijing’s sweeping crackdown.

Xiao Yaqing is among the biggest names caught up in President Xi Jinping’s anti-corruption drive, and the investigation into him comes ahead of a key leadership summit this autumn where the Chinese leader will seek to cement his grip on power.

Ostensibly a crackdown on corruption, critics say the wide-ranging campaign launched just after Xi took power in 2012 has also served to remove those voicing criticism of the all-powerful leader, or seen as a threat.

Xiao is facing charges of “violating discipline and law”, and is “currently under review and investigation”, state broadcaster CCTV said, without giving more details. 

His fall from grace comes amid a widespread crackdown on Chinese tech companies, which Beijing fears wield too much power due to lax regulations.

A businessman-turned-politician, Xiao started his career in the early 1980s on a factory floor in northeast China’s rust belt as an engineer and then worked his way up to head the State Administration for Market Regulation, which determines key market rules in China.

In July 2020, he was appointed to the top job at the Ministry of Industry and Information Technology, which decides important issues, including China’s roadmap to dominate the electric vehicle industry and the country’s ambitious 5G communication network plan.

The ministry also played a key role in the now-scrapped “Made in China 2025” policy, which outlined Beijing’s plans to dominate 10 cutting-edge technologies, from artificial intelligence to robotics.

Regulatory chiefs, insurance giants, security officials and financiers are just some of the bigwigs to recently face censure or prosecution under the anti-corruption drive, though it is rare for a minister to face investigation while still holding office.

The vast majority of figures investigated for corruption are eventually convicted.

Former justice minister Fu Zhenghua is awaiting sentencing after pleading guilty on Thursday to charges of “bribe-taking and bending the law for personal gains”.

Prosecutors said Fu had illegally received property and money worth more than 117 million yuan ($17 million), CCTV reported.

Ex-deputy public security minister Sun Lijun — who oversaw security in Hong Kong during months of unrest in 2019 — was arrested in April 2020. 

He later confessed on state TV that he had received a series of bribes worth $14 million, hidden inside boxes of what appeared to be seafood.

The former chairman of Huarong — one of China’s largest state-controlled asset management firms — Lai Xiaomin was executed in January 2021 for receiving “extremely large” bribes.

The US economy contracted for a second straight quarter between April and June, government data showed Thursday, fueling recession fears just months before key midterm elections in a blow for President Joe Biden.

Gross domestic product declined at an annual rate of 0.9 percent in the second quarter, following a bigger drop in the first three months of the year, according to the Commerce Department.

Two quarters of negative growth is commonly viewed as a strong signal that a recession is underway, and a downturn in the world’s largest economy would have global consequences, as well as domestic political costs.

Though Biden says he is confident the US economy is not suffering a downturn, his critics are sure to seize on the report as proof of the veteran Democrat’s mismanagement of the economy.

After a 1.6 percent decline in the first three months of the year, the report noted drops in government spending at all levels and private investment on goods, including autos, and on residential buildings fell in the second quarter, despite an increase in exports.

The US economy also continues to battle sky-high inflation, as a result of supply chain snarls due to Covid lockdowns, as well as Russia’s war in Ukraine which has sent prices of food and fuel soaring.

Meanwhile, a key inflation measure, the personal consumption expenditures price index, rose 7.1 percent in the latest three months, the same pace as in the first quarter, the data showed.

With the labor market showing some signs of cooling and supersized interest rate hikes by the Federal Reserve slowing the economy — the latest coming on Wednesday — many economists say the recession discussion is more a matter of when, not if.

And that poses a major political headache for the president, who has seen his approval ratings plummet in recent months as American families struggle to make ends meet due to surging inflation.

– Way out? –

In recent days, Biden has led his administration in a chorus of denial.

“We’re not going to be in a recession, in my view,” he insisted Monday, stressing the strength of the labor market.

It would be highly unusual for an economy still adding jobs at a rapid pace, and with near record-low unemployment, to fall into recession.

Fed Chair Jerome Powell agreed, and said that even with ongoing interest rate hikes to slow the economy, it is possible to cool price pressures without causing a downturn or a big jump in joblessness, although he acknowledged the path to thread that needle is narrowing.

The central bank announced another big interest rate hike of 75 basis points on Wednesday, the fourth increase this year, and stressed it would not hesitate to go for “another unusually large increase” if needed.

Powell said the overriding aim was to get sky-high inflation moving back down toward two percent, but the Fed wants to strike a balance.

“We’re trying to do just the right amount. We’re not trying to have a recession and we don’t think we have to,” he told reporters.

President Joe Biden and Chinese counterpart Xi Jinping spoke by phone Thursday on mounting tensions over Taiwan, a festering trade dispute and their bid to keep the superpower rivalry in check.

The White House said the phone call started at 8:33 am in Washington (1233 GMT). A statement would be issued after the call ended, a spokesman said.

While this was Biden’s fifth talk with Xi since becoming president a year and a half ago, it’s getting hard to mask deepening mistrust between the two countries.

Already stuck in a trade war, Beijing and Washington increasingly risk open conflict over Taiwan, with little sign of resolution on either front.

“Tensions over China’s aggressive, coercive behavior in the Indo-Pacific” will be high on the agenda, said White House National Security Council spokesman John Kirby.

The latest flashpoint is a possible trip by Biden ally and speaker of the House of Representatives, Nancy Pelosi, to the island, which Beijing claims is part of China but has its own distinct, democratic government.

Although US officials frequently visit Taiwan, separated by a narrow strip of water from the Chinese mainland, Beijing considers a Pelosi trip as a major provocation. She’s second in line to the US presidency and given her position may travel with military transport.

Washington will “bear the consequences” if the trip, which Pelosi has yet to confirm, goes ahead, China warned Wednesday.

General Mark Milley, chairman of the US joint chiefs of staff, told reporters that if Pelosi asks “for military support, we will do what is necessary to ensure a safe, safe conduct of their business.”

And the dispute around Pelosi is the tip of an iceberg, with US officials fearing that Xi is mulling use of force to impose control over democratic Taiwan.

Once considered unlikely, an invasion, or lesser form of military action, is increasingly seen by China watchers as possible — perhaps even timed to boost Xi’s prestige when he moves later this year into a third term.

Biden’s contradictory comments on whether the United States would defend Taiwan — he said in May that it would, before the White House insisted there was no change in the hands-off “strategic ambiguity” policy — have not helped the tension.

– No face-to-face –

Biden prides himself on a close relationship with Xi going back years but — in large part due to Covid travel restrictions — the two have yet to meet face-to-face since he took office.

According to the White House, Biden’s chief goal is to establish “guardrails” for the two superpowers.

This is meant to ensure that while they sharply disagree on democracy, and are increasingly rivals on the geopolitical stage, they can avoid open conflict.

“He wants to make sure that the lines of communication with President Xi on all the issues, whether they’re issues again that we agree on or issues where we have significant difficulty with — that they can still pick up the phone and talk to one another candidly,” Kirby said.

Where to place the guardrails, however, is challenging amid so many unresolved disputes, including a simmering trade war begun under Donald Trump’s presidency.

Asked whether Biden could lift some of the 25 percent import duties placed on billions of dollars of Chinese products by Trump, Kirby said there was still no decision.

“We do believe… that the tariffs that were put in place by his predecessor were poorly designed. We believe that they’ve increased costs for American families and small businesses, as well as ranchers. And that’s, you know, without actually addressing some of China’s harmful trade practices,” Kirby said.

But “I don’t have any decision to speak to with respect to tariffs by the president. He’s working this out.”