U.S. wholesale inventories barely rose in May as automobile stocks recorded their biggest drop in more than 2-1/2 years, suggesting inventory investment likely remained a drag on economic growth in the second quarter. The Commerce Department said that wholesale inventories edged up 0.1% after increasing 0.7% in April. Economists had forecast wholesale inventories rising 0.2% in May. Inventories are a key component of gross domestic product changes. The component of wholesale inventories that goes into the calculation of GDP - wholesale stocks excluding autos - increased 0.4% in May.

Higher prices for commodities, including petroleum, largely accounted for the gain in ex-autos wholesale inventories in May. As such, this will probably not provide a boost to second-quarter GDP growth, when adjusted for inflation.

Following the data, the Atlanta Federal Reserve trimmed its second-quarter GDP growth estimate by one-tenth of a percentage point to a 2.3% annualized rate.

"What has been reported suggests there was a sharp slowing in the pace of inventory accumulation between the first quarter and second quarter," said Daniel Silver, an economist at JPMorgan in New York.

According to Silver, data so far suggested that the inflation-adjusted change in inventories in the second quarter was between a $20 billion and $25 billion rate. That implied inventories subtracted about one percentage point from GDP growth in the second quarter, he said.

A report last week showed factory inventories slipped in May. Retail inventory data for May will be published soon. Inventory investment cut just over two-tenths of a percentage point from GDP growth in the first quarter, helping to hold back the rise in output to a 1.1% annualized rate.

Businesses accumulated record inventory in the first half of 2015, which outstripped demand. Inventories have weighed on GDP growth since the third quarter of that year as businesses tried to unload the piles of unwanted merchandise.

Still, inventories remained high in the second half of 2015 and the first quarter of 2016.

"If our second-quarter estimate of the inventory data is correct, the inventory correction should be over by the start of the third quarter, making inventories much more favorable for growth beginning in the third quarter," said Silver.

In May, auto inventories fell 1.9%, the biggest decline since September 2013. Wholesale stocks of petroleum increased 3.2% and farm products inventories soared 5.9%.

Sales at wholesalers increased 0.5% in May, adding to the prior month's 0.8% gain. With sales rising for a third straight month, it would take wholesalers 1.35 months to clear shelves, down from 1.36 months in April.

CANADA

The Bank of Canada is cutting its economic outlook for the year, saying the extensive damage from the Alberta wildfires will result in an economic contraction in the second quarter.

The central bank's forecast was released along with its scheduled announcement on its benchmark interest rate, which Governor Stephen Poloz left at its rock-bottom level of 0.5%, as expected.

Among the projections, the bank for the first time released numbers on the potential impact of the United Kingdom's vote to leave the European Union, also known as Brexit.

It said the fallout from the vote will lower global GDP by 0.2% by the end of 2018, with most of that expected to be tied to an extended period of uncertainty around investment.

"The impact on the level of Canadian GDP over the projection period is likewise anticipated to be modest, about -0.1%, reflecting, among other factors, Canada's small direct trade exposure to the UK," the bank said in its latest monetary policy report.

The bank underlined the difficulty of determining the scope of Brexit's impact on factors like financial conditions, trade and confidence.

"Assessing all of these effects is particularly challenging, since many important elements will be understood only as the process unfolds," the report said.

The report also provided a more-detailed assessment of the effects of the huge Alberta wildfires that erupted in May. The disaster forced the temporary shutdown of key oil sands facilities, led to Fort McMurray's evacuation and destroyed more than 2,000 structures.

The central bank estimated the fires shaved 1.1 percentage points from second-quarter growth -- as measured by real GDP -- and forced the economy to contract in that period by 1.0%. In April, before the wildfires, the bank had forecasted the economy would grow in the second quarter by 1.0%.

After the fires swept through Fort McMurray, Poloz gave a preliminary assessment that it could knock between one and 1.25 percentage points off annualized second quarter growth.

But looking forward, the bank predicted a "marked rebound" in the third quarter with the resumption of oil production and rebuilding efforts in the region. It projected third-quarter growth to rise by 1.3 percentage points, helping the economy expand in that quarter by 3.5%.

That bounce back is also expected to be fueled by boosts from the federal government's measures to enhance child benefits -- which will support household consumption -- and its commitment to increase infrastructure spending, the bank said.

The central bank also lowered its 2016 growth projection to 1.3% from its April estimate of 1.7%. In doing so, it pointed to weaker outlooks for investment and exports that have more than offset the positive effects of the recent rise in oil prices.

It now expects the economy to grow by 2.2% next year and 2.1% in 2018. In April, the bank had predicted growth of 2.3% in 2017 and 2.0% in 2018.

The bank is also anticipating the country's non-resource sector to "assert itself as the dominant trend in the second half of 2016." It expects increased foreign demand and fiscal spending, along with the past depreciation of the Canadian dollar, to lift growth.

"The fundamentals remain in place for a pickup in growth over the projection horizon, albeit in a climate of heightened uncertainty," the bank said in the statement that accompanied its interest-rate announcement.

In explaining its decision to stand pat on the trend-setting rate, the bank said inflation had remained within the ideal target range even though it had recently been a little higher than expected.

The bank did, however, warn that financial vulnerabilities are "elevated and rising," particularly in the Vancouver and Toronto areas.

The report reiterated Poloz's past warning that soaring house prices in the hot markets of Vancouver and Toronto have been climbing at an unsustainable clip. He has said the prices have outpaced local economic fundamentals such as job creation, immigration and income growth.

ASIA

CHINA

With its second-quarter growth figures due soon, China has been careful to prep markets for further signs of a gradual deceleration in the world's second-largest economy.

Chinese premier Li Keqiang said this week that the Chinese economy was "basically stable," which was read as a signal second-quarter growth would be near the first-quarter level of 6.7%.

This followed comments by Li on July 4, reported by state media agency Xinhua, that it was "not easy" to achieve Q1's 6.7% growth rate and that the economy would show "continued steady development."

Most analysts are looking for more downside than upside in the three months to June 30, on the back of domestic factors including an ongoing austerity drive, as well external factors such as the declining Chinese yuan after the U.K.'s vote to exit the EU.

Major risk factors to second-quarter growth included overcapacity in the heavy industry sector and slowing global demand for Chinese products.

Barcelona-based FocusEconomics said it expected growth to have "moderated slightly" in the second quarter as the effects of policy stimulus unveiled at the end of 2015 faded.

In particular, investment in the real estate sector slowed in May, and state-owned enterprises accounted for the bulk of new investment during Q2, while private business investment remained weak, FocusEconomis head of economic research Ricard Torne wrote in a recent report. This was sparking concerns about the quality of growth in China, he added.

"Although this year's policy action signaled that authorities will prevent any sharp slowdown, the economy is expected to gradually decelerate in the coming quarters," Torne said.

"While slower growth will partially reflect a healthy domestic rebalancing, mounting economic imbalances and weak global demand have the potential to increase turbulence in China's expected soft-landing."

Helen Zhu, head of China Equities at BlackRock, said she did not expect any major upside surprise, nor a contraction in the headline number, but that the economy had not yet bottomed.

With Beijing's target compound annual growth rate at 6.5% for the next five years, that meant there would be times when the figure will be "noticeably below that", she told CNBC's "Halftime Report".

Zhu said to expect a 20 to 30-basis point drop in GDP each quarter going forward. A basis point is 1/100th of a percentage point.

There's no need for great concern, though, she added.

"I don't think we need to focus that much in terms of the growth. Most of the opportunities in China are really about the structural reforms and all of the major changes they are doing to the economy," she said.

Indeed, China's Li also said that the country was committed to continued efforts to tackle steel overcapacity.

But despite Chinese leaders' cautious statements ahead of the Q2 growth data, and its focus on reform, there has been speculation that the economic giant may join the ranks of various central banks in cutting interest rates to boost growth.

"It makes more sense for China to cut interest rates," Hao Zhou, Commerzbank's senior emerging market economist for Asia, told CNBC's "Squawk Box" on Monday.

"China is talking about supply-side reforms but I think China needs to stimulate on the demand side," he added.

SINGAPORE

A rebound in manufacturing and services helped Singapore’s economy grow at a faster pace in the second quarter.

The advance estimate of headline GDP grew by 2.2% year-on-year in the three months to June 30, up from the upwardly revised 2.1% pace (previously 1.8% in the March quarter.

This was right in line with the average expected by economists, and the fastest pace of growth since the March quarter of 2015.

The result was helped by the manufacturing sector swinging back to positive growth, of 0.8% year-on-year from a 0.5% contraction in the March quarter. Growth in the services sector was flat at 1.7%, while growth in construction slowed to 2.7% from 4.5%.

Seasonally adjusted, GDP grew by 0.8% quarter-on-quarter in the June quarter, up from 0.2% in the first three months of the year, and just one tenth of a percentage point below market expectations.

At the seasonally-adjusted, quarter-on-quarter level, it was the services sector that saw a recovery in growth, to 0.5% in the three months to June 30 from the 4.8% quarter-on-quarter contraction in March quarter. Growth in the manufacturing and construction sectors were positive, but slowed sharply.

Ahead of the release, Weiwen Ng and Glenn Maguire at ANZ Banking Group said a potential upside surprise in the advance estimate of GDP is expected to be transitory.

They said:

“External weakness is spilling into domestic activity. This is evident in the elevated number of business closures, which are at recession level and broad based. This will continue to be a drag on the labor market and mute both growth and inflation outlook.”

Brexit poses modest downside risks to Singapore via both financial and trade channels.

The ANZ economists concluded:

“Policy support needs to step up and broaden from exchange rate easing to fiscal support to counteract the waning momentum in domestic activity as well as the absence of an external led demand.”

SOUTH KOREA

The Bank of Korea has revised its 2016 expectations for economic growth and inflation lower, a further indication of strain in the South Korean economy as it battles sluggish global growth.

The bank now expects the economy to grow 2.7% this year, down from an original estimate of 2.8%, on the back of increased uncertainty from factors beyond South Korea, such as the UK’s recent vote to leave the EU. Consumer prices are expected to grow 1.1%, down from an originally-stated 1.2%.

The revisions were announced shortly after the BoK said it would be keeping its benchmark lending rate on hold at 1.25%, following a surprise cut in June. Plans for a Won20tn ($17.5bn) stimulus package were also outlined at the end of last month.

Analysts at ANZ said:

“Monetary policy is now working in tandem with the fiscal levers following the announcement of the additional KRW20trn of fiscal support last month. Given the lag in fiscal policy transmission, we are of the view that the central bank has the space to remain on hold through 2016 as it assesses the effect of the combined policy stimulus amid uncertainties in global demand.”

But they added:

“Monetary policy has not yet reached its lower limit. We still expect the final cut to occur in Q1 2017. As corporate restructuring plans become more concrete, its likely negative impact on domestic demand will become more evident over time.”

EUROPE / AFRICA / MIDDLE EAST

AZERBAIJAN

Azerbaijan's gross domestic product shrank by 3.4% in the first half of this year after rising by 5.7% in the same period of 2015, the State Statistics Committee said.

Azerbaijan's government forecasts GDP to rise by 1.8% this year.

EUROPEAN UNION

(1.) Sanctions

Portugal and Spain are facing sanctions after failing to take action to correct their excessive GDP deficits, EU's Economic and Financial Affairs Council said.

The Council's decisions will trigger sanctions under the excessive deficit procedure. They are based on article 126(8) of the Treaty on the Functioning of the European Union, the statement reads.

"On 12 July 2016, the Council found that Portugal and Spain had not taken effective action in response to its recommendations on measures to correct their excessive deficits. It confirmed that the two countries will not reduce their deficits below 3% of GDP, the EU's reference value for government deficits, by the recommended deadline. And in both cases, it found the fiscal effort to fall significantly short of what was recommended," the Council said in a statement.

Eurozone finance ministers have agreed to officially declare the two countries in breach of EU public spending rules, a key step prior to imposing penalties on the member states.

The ministers are following recommendations of the European Commission, the executive branch of the EU, despite growing fears that imposing penalties will further undermine the authority of Brussels in the wake of the Brexit referendum.

(2.) BREXIT Effect

The uncertainty from the 'Brexit' will reduce economic growth of both euro area and the UK, the economic affairs commissioner Pierre Moscovici said after the recent meeting of Eurozone finance ministers in Brussels.

He cautioned that the longer the period of uncertainty, the costlier it will be for the region.

According to earlier estimates, the 'Brexit' is set to trim the British GDP growth by 1-2.5% by 2017, he said.

The growth in the euro area is likely to register a reduction of 0.2-0.5% in growth by 2017, he added.

In May, the commission had projected 1.6% growth for 2016 and 1.8% for next year.

The International Monetary Fund last week lowered its euro area growth projections citing the uncertainty created by the surprise 'Brexit' vote. The lender forecast 1.6% expansion this year and 1.4% in 2017.

IRELAND

Ireland's economy grew an incredible 26.3% in 2015, according to new data released by the country's Central Statistics Office.

GDP growth was revised upwards from 7.8% at the previous estimates, to more than 26% at the final reading after the country received "more complete and up to date data" about its finances.

"Gross Domestic Product (GDP) increased by 26.3% over the same period. The present release is based on more complete and up to date data than that which was available when the Q4 2015 estimates were published in March 2016. The 2014/2015 volume changes indicated at that stage were GDP (7.8%) and GNP (5.7%)," a release from the CSO said.

The absolutely incredible rise in GDP came as a result of a combination of one-off factors, including aircraft purchases, corporate restructuring and companies re-locating assets to Ireland. Every single sector of the economy grew in 2015, the stats show, with the building sector growing an astonishing 87%.

"The very dramatic increase has increased the capacity for production in the economy and impacts the accounts for 2015 in the increase of exports and imports. Employment has not changed greatly as a result," Michael Connolly, a senior statistician at the CSO said, according to Irish broadcaster RTE.

Despite the huge gains seen in 2015, Irish GDP actually shrunk in the first quarter of 2016, the CSO said. There was a 2.1% fall in growth, which disappointed against the forecasts of economists who had predicted a 1.5% fall. On an annual basis, GDP grew 2.3%, compared to a predicted 7.2%.

There are fears within Ireland that the performance of the country's economy, which is closely linked to the UK, will take a hit from Britain's vote to leave the EU, with forecasts that an overall GDP cut of 1.6% could occur by 2021 as a result of Brexit.

"Over the period 2017 to 2021, we think the net effect on GDP would be somewhere between 0.5 and 1.6 percent," Irish Finance Minister Michael Noonan said prior to the vote. Brexit risks are however "containable," Noonan said.

"We're pointing out that there's a risk from Brexit. It's not a risk that would damage the general thrust of what we're saying today."

KRYGYSTAN

Kyrgyzstan's gross domestic product fell 2.3% year-on-year in January-June as output at the Kumtor gold mine, which accounts for much of the country's industrial output, declined sharply, the state statistics committee said recently

Excluding Kumtor, the Central Asian nation's GDP rose 1.2% year-on-year, it said. In the same period of 2015, Kyrgyzstan's economy grew 6.8%, or 3.7% excluding Kumtor.

Kumtor Gold Company said in January it planned to produce between 14.9 and 16.5 tons of gold in 2016, versus 16.2 tons last year.

But this will be weighted to the second half of the year, because of the geological structure of the deposit.

NAMIBIA

A leading Namibian stock brokerage has revised the country’s gross domestic product (GDP) growth rate for 2016 downwards from 4.8% to 4.1%, and expects inflation to remain unchanged at 6.5%.

In its Quarterly Investment Strategy for the third quarter of 2016, Simonis Storm Securities (SSS) said they also expect the Bank of Namibia (BoN) to follow South Africa (SA) more closely with regard to monetary policy due to a continued murky economic outlook.

“The Bank of Namibia’s monetary policy is to achieve price stability and to maintain the one-to-one currency peg regime with the South African Rand (ZAR). Because of the currency peg regime, Namibia’s monetary policy is technically ineffective and BoN is thus inclined to follow SA’s monetary policy. This leaves the Namibian financial system vulnerable to political and macroeconomic developments in SA, such as the fluctuations of the ZAR and its impact on price stability. Since Namibia is highly integrated into the SA economy, Namibia’s inflation is driven by SA to a large extent, because a large percent of goods consumed in Namibia comes from SA. This has a negative effect on real returns, particularly for longer-term bonds,” reads the SSS report.

SSS noted that the impact of financial repression is starting to impact Namibia. For instance, the 10-year government bond yield at the end of May 2016 stood at 10.8 percent, while inflation for the corresponding period came through at 6.7 percent.

“This translates into a real return of 4.2% compared to the more robust real return of 6.2% in May 2015 and 6.0% during April 2015,” the SSS pointed out.

SSS elaborated that in SA a recession is “probably inevitable” due to challenges of perpetual mismanagement in public office, unstable utilities, corruption, a shrinking mining sector and tight disposable incomes of consumers.

“The World Bank and IMF expectation for GDP in SA is now 0.6% for 2016. Economists and fund managers believe that the credit downgrade that was avoided is only postponed and some now expect it to eventually happen by December this year,” reads the report.

SSS also questioned what effect events in South Africa will have on Namibia. “Well, it was no surprise that the Namibian Stock Exchange (NSX) was stable during the outcome of the Brexit referendum. If only our local market was deeper and more liquid, but as they say be careful what you wish for. As we well know, liquidity creates downside risk. However, on the other hand, any market without liquidity may also be deemed artificial,” states the SSS report.

SSS also cautioned that Namibia has a number of problems of its own as a country that seems to plan very poorly. This, they say, is evidenced by the water crisis, a possible bubble in the construction and real estate market, a disappearing Angolan consumer, a precarious foreign reserves position and a high reliance on government spending and mining.

“Incidentally, these are the main areas where we believe growth will cushion us from a full-blown recession. Government has communicated that they will consolidate, meaning that fiscal policy may be the only salvation out of an economic contraction, and at the same time certain local mines, particularly gold and uranium mines, will provide the much needed support to keep the economy afloat.”

Meanwhile, the World Bank and the International Monetary Fund (IMF) have revised global GDP growth downwards with the IMF now expecting 3.2% and the World Bank expecting 2.4%. India is now registering the highest economic growth rate amongst major economies, with 7.6% expected for 2016.

China has been slowing from a high recorded at 14.2% during Quarter 4 of 2007 to the current expectation of 6.7% for 2016.

“Developed market economies are struggling to consistently record growth rates of above 2.0%. It would seem that the economic growth that has resulted from cheap money over the last 7 years is no longer, but at the same time stock markets in the United States and closer to home in SA are close to all-time highs and refuse to adjust. This is all happening in a time when central banks are refusing to accept that they may be starting to lose the fight against deflation,” the SSS report continued.

“Today, the low interest rate environment is not only driven by macroeconomic factors, but foremost by policy action that helps governments deal with the high sovereign debt burden globally. This is widely known as financial repression. A situation where interest rates are artificially kept low for long periods of time, inadvertently penalizing investors and rewarding borrowers,” said SSS.

“Without a doubt, the cost of financial repression has been evident in developed economies, where interest rates are maintained near zero, and in some cases at negative yields. Sure enough, we are also starting to witness financial repression rearing its head in emerging markets with southern Africa being no exception. This could be largely ascribed to an acceleration in inflation relative to interest rates, which ultimately erodes real returns. The main question that every investor should be asking is, ‘How long will it be before investors start demanding higher returns on their investments?’” the SSS report stated.

RUSSIA

On the heels of last year's recession, GDP will fall by another 1.2% in 2016, the International Monetary Fund reports. However, private consumption and investment are likely to remain low in the medium term due to the slowdown in credit financing and tighter government fiscal policy. The IMF predicts that the Russian economy will not grow by more than 1.5% without structural reforms and because of unfavorable demographics.

According to IMF estimates, the budget deficit in 2016 will total 3.2% of GDP. That makes it necessary to consolidate the budget, and the IMF supports the idea of taking additional fiscal measures totaling 4% of GDP. In that way, the Russian budget can eliminate all deficits by 2020.

The IMF, however, feels that Moscow could accomplish more if it did not simply cut budget expenditures across the board, but analyzed the quality and productivity of each budget reduction individually.

According to IMF estimates, Russia could consolidate up to 12% of GDP over the next three years. It could achieve about one-third of that total, or 4.2% percent of GDP, by increasing revenue, and the remaining two-thirds, or 7.6%, by reducing expenses.

Russia can achieve revenue increases by reducing tax benefits (adding 2% of GDP), raising excise duties (contributing another 0.7% of GDP), improving VAT administration, customs duties and social security payments (adding 1.2% of GDP), and increasing collection of personal income tax (upping the total by 0.3% of GDP).

Russia can cut costs with the help of social reforms. Raising the retirement age would save 2-3% of GDP, introducing targeted social assistance would save another 2% of GDP, and limiting early retirement would save 0.7% of GDP.

Reducing subsidies and increasing the profitability of capital investments would save an additional 1.5% and 0.4% of GDP respectively.

The IMF also recommends that Russia simultaneously beef up financial oversight and control of state-owned enterprises and reinstitute three-year planning and fiscal rules.

According to leading CMASF expert Yelena Penukhina, such large-scale spending cuts would dampen economic growth. Penukhina estimates that Russia could save as much as 2.6% of GDP by increasing the retirement age by six months.

Natalya Akindinova of the HSE Development Center considers the IMF proposals for reducing the Russian budget too radical.

She argues that even cuts amounting to 3-4% of GDP would cause a major shock to the economy. She concedes that it is possible to economize on social spending but recommends cutting back on other budget items such as the siloviki and government administration instead. At the same time, Akindinova argues, spending on healthcare and education should increase.

One federal official said that the consolidation process should be smooth and well-considered.

Federal budget revenues fell by 5.9 trillion rubles ($84 billion) in the first half of 2016, down to the level of 2011 in nominal terms. Nominal growth in incomes was only 10% this year, compared to almost 60% five years ago. This current growth is primarily due to the increase in defense spending over the past five years to 5.7% of budget expenditures, even while the aggregate share of spending on education, healthcare, culture, housing and social policy fell by 6.7%.

According to Audit Chamber chairperson Tatyana Golikova, the authorities should reconfigure their spending priorities for the 2017 budget based on the real needs of the country and the people. She has consistently opposed across the board spending cuts and urges a review of their internal structure. "When money is short, the demand for justice increases," she said. "And we should show the public that this is a fair distribution of the limited resources the state currently has." The Audit Chamber identified more than 0.5 trillion rubles ($8.2 billion) of inefficient government spending in 2015.

UNITED KINGDOM

Barclays have released their latest economic forecasts and the standout figures can be found in their slashing of the UK's expected quarterly growth figures.

A recession is defined by two consecutive quarters of negative growth, a criteria that will be met if analysts at the UK bank are correct.

The spark to the decline in economic output is the withholding of investment decisions by businesses who are now faced with many uncertainties following the vote to exit the European Union.

As a result of deferred or cancelled investments Barclays expect the UK economy to contract in H2 and 2017, albeit relatively modestly.

Third quarter growth is forecast at -0.2%, fourth quarter growth at -0.3% and Q1 2017 growth at -0.4%.

Barclays follow a number of other major institutions in forecasting recession.

“The quickest way for non-financial corporations, especially in the manufacturing industry, to react to heightened uncertainty is cut production and meet demand by destocking until the situation gets clearer,” say Barclays in a note to clients.

Analysts believe consumption - the engine of the UK economy - should soften on the back of declining confidence, which would in turn halt job creation and wealth creation effects.

This will be in part driven by a much weaker currency and concerns about real estate valuations.

The latest survey data on the construction sector showed a sharper-than-forecast drop in activity, to the extent that the sector is now shrinking, providing the first concrete economic indicator that the economy could be shifting into reverse.

Barclays warns that the improved net exports contribution derived from weaker exchange rates will only partially offset this drag from investment and consumption.

“The risk to the UK outlook may be tilted for a potentially even deeper recession,” say Barclays.

The depth of the recession will depend on the policy response from government and the Bank of England.

We see little concrete moves coming out of the government at this stage owing to the leadership battle in the ruling Conservative party.

However, eyes will turn to the Bank of England’s Monetary Policy Committee on Thursday, July 14th.

Markets are ascribing a 75% chance of a 0.25% interest rate cut to be delivered.

Cutting rates will ensure lending gets cheaper and it may push the hand of those company directors who have impending investment decisions to make.

The Bank may also expand its quantitative easing program in an effort to ‘oil’ the flow of finance through the economy yet further.

McIlvaine Company

Northfield, IL 60093-2743

Tel: 847-784-0012; Fax: 847-784-0061

E-mail: editor@mcilvainecompany.com

Web site: www.mcilvainecompany.com