When compared with the previous quarter, the changes in relative growth strength are more apparent. It is clear in the graph below that France, then Germany were the fastest growing Group of Seven countries and Japan, the slowest.

After leading the way in GDP growth for 11 quarters, the U.S. gave way to Japan in the fourth quarter of 2005 when compared both with the previous quarter and same quarter in 2004. However, the U.S. quickly resumed its lead in 2006. After anemic performances in 2005, there has been a marked improvement this year for Europe's big three - Germany, France, Italy. In Japan, revised GDP shows that domestic consumption is at last contributing to growth. The Canadian economy continued to benefit from soaring commodity and energy prices despite the strong Canadian dollar which has had a devastating effect on many of the nation's export-dependent industries. The pressure on exporters is evident in the continuing decline of the country's merchandise trade surplus.

Domestic demand revives in Europe
EMU - The European Monetary Union (EMU), made up of 12 national economies but relying on Germany, France and Italy, lagged the U.S., UK and Japan in year-on-year GDP growth until the second quarter of 2006, when it barely overtook the UK and Japan. Part of the EMU's problem continues to be structural in nature although some progress has been made. Another part of the problem is the dichotomy between fiscal and monetary policy. While the European Central Bank (ECB) is responsible for monetary policy, fiscal policy is left to 12 individual governments and they do not always see eye to eye with each other, or with the ECB for that matter. Fiscal restraint has been thrown away in favor of fiscal stimulus. Of the big three, Germany has once again taken the lead and is now growing faster than either France or Italy on the year. EMU second quarter GDP was up 0.9 percent and 2.6 percent when compared with the same quarter a year ago.

Many of Germany's economic ills can still be traced back to reunification in 1989-90 when appropriate economic policies were not developed to deal with the disparities between East and West. But progress has been made in structural reforms especially in the labor market. Although exports continue to fuel Germany's growth, domestic demand has shown signs of life. The euro's strength weakened exports to non-European Union countries but did not affect intra-EU trade - that is trade between EU member countries. Germany has benefited from improved growth in other EU countries. German GDP was up 0.9 percent on the quarter and up 2.4 percent on the year.

France has been more successful in introducing structural reforms that have promoted growth, competitiveness and employment. The economy also went through a weak growth period due to faltering domestic demand especially in 2005. GDP climbed 1.2 percent and 2.6 percent on the year in the second quarter.

Italy's economy stalled in 2003 and continued to struggle in 2004 and 2005. GDP declined in the fourth quarter of 2004 and first quarter 2005. It also edged down slightly in the fourth quarter of 2005. Italy has been particularly hard hit by Chinese exports of products that were formally the country's domain such as shoes. However, the economy has revived in the first two quarters of 2006 along with the rest of the EMU. In the second quarter, Italy's GDP was up 0.5 percent and 1.5 percent when compared with last year after climbing 0.7 percent and 1.6 percent respectively in the first.

UK's economy continues its recovery as housing prices and consumer spending adjusts to higher Bank of England rates. Although it softened in 2004, the economy did not come close to weakening like its European neighbors. Though unemployment has crept up from historic lows, it is still quite low compared with the country's European counterparts. Inflation has become troublesome and is above the Bank's inflation target of 2 percent. The CPI, the Bank of England's inflation measure, was up 2.5 percent on the year in August. Manufacturing continues to recover slowly. Britain's second-quarter GDP was up 0.8 percent and 2.6 percent on the year.

The following two graphs below show recent year-over-year GDP growth rates for the major industrialized economies. In the first graph are the United States, Britain, the European Monetary Union and Japan. The second graph includes the EMU's three largest economies - Germany, France, Italy - plus Australia and Canada.

Asia and Australia thrive on exports
Higher interest rates have cooled Australia's economy significantly. Previously, domestic demand had been spurred on by consumer spending and a construction boom. Low mortgage rates boosted residential construction, and that spending spilled over to more purchases of household furnishings and electrical appliances. After increasing interest rates in November and December of 2003, the Reserve Bank of Australia raised rates in March 2005 (to 5.5 percent). Its policy interest rate remained there until May 2006 when the RBA increased rates once again. They followed this by a second increase to 6 percent in August 2006. The RBA's rate increases tamped growth in the second quarter despite heavy global demand for the country's commodities. Second quarter GDP was up 0.3 and 2.0 percent when compared with the same quarter a year ago.

Japan's economic growth has eased after a torrid 2005. The Bank of Japan is in the process of normalizing monetary policy after formally stating that deflation is over. Earlier growth was solely the result of exports. But now domestic demand shows signs of stirring and banks have begun lending again. Financial sector strains, including the need to issue a large volume of public debt without pushing up interest rates, present formidable challenges. Recent economic data show that softness is continuing into the third quarter. Second quarter GDP was revised to a gain of 0.2 percent, 2.5 percent on the year and at an annualized rate of 1 percent.

Canada and U.S. continue on growth path
The Canadian economy continues to benefit, like Australia, from commodity exports. While Australia has benefited from Asian growth, Canada's best customer is the United States. Exports to the U.S. are down primarily because of weaker demand for Canadian autos and parts as well as forest products according to the latest trade data. Residential construction has slowed in response to interest rate increases by the Bank of Canada. Consumer spending, which accounts for almost 60 percent of the economy, and business fixed investment, which includes spending on commercial construction as well as equipment and software, both eased in the second quarter. They were up 1 percent and 0.6 percent on the quarter. In the first quarter they were up 1.3 percent and 2.4 percent respectively. As a result, second quarter gross domestic product was up 0.5 percent and 2.9 percent when compared with the same quarter a year ago.

The United States also grew at a slower pace in the second quarter after a very robust first quarter. The U.S. economy has been motoring along thanks to very loose fiscal policies and despite continued Federal Reserve interest rate increases that have taken the Fed funds rate from 1 percent to its current 5.25 percent level. Exporting countries such as Japan and Germany, given the weakness of their domestic demand, are especially dependent on U.S. growth. And U.S. consumers have done their part by maintaining demand for imported consumer goods, helping to send the merchandise deficit to all-time highs. Second quarter GDP growth cooled to a 0.7 percent increase when compared with the previous quarter and 3.6 percent when compared with the second quarter of 2005. On an annualized basis, GDP was up 2.9 percent.

Bottom line
There are some questions going forward - can Germany continue to grow and can Japan continue to improve domestic demand and keep deflation at bay. Assuming no exogenous events, growth is expected to pick up in the global economy during the second half of 2006. This should help the U.S. - increased growth abroad could mean more exports to Europe and Asia, relieving some of the onus of being the sole engine of worldwide growth. The important thing for Europe and Asia is that they continue to proceed with badly needed structural reforms despite their recoveries.