The international environment

• There is mounting evidence that the North American economies have begun to recover. Following a strong performance in the first quarter of the year, activity growth in Japan and Germany has slowed. Elsewhere in Europe activity remains subdued.
• Currency movements have been less dramatic than in the first quarter of the year, although the US dollar continued to appreciate against the EMS currencies during the second quarter. The yen, after falling from the recent peak in February, averaged around its end-March level against the dollar over the second quarter of the year, and strengthened in effective terms, reflecting deutschemark weakness. In July, the US dollar and the yen depreciated in effective terms, while the major ERM currencies strengthened.
• Inflation has fallen in the United States and Japan, while inflationary pressures have intensified in Germany.
• The US trade deficit narrowed, while Japan's external sector continued to perform strongly. Unification has pushed the German trade account into deficit.

The international environment