Our first quarter nowcast confirms the outlook for the Belgian economy: it keeps cruising at close to trend-growth rates (0.3% q/q), despite the challenging external environment. One-off factors temporarily sped up normalisation in both firm investment and international trade, but private consumption once again carries the brunt of economic growth. Consumption patterns are changing however, with more e-commerce and share of total outlays spent on services. Belgian firms continue to demonstrate resilience, while the labour market cools down.
After eight years of socialist government, the centre-right Democratic Alliance coalition won the snap general election held on 10 March. This shift in the political landscape, where no party now has an absolute majority in Portugal’s Parliament, could be a source of instability in the country. Nevertheless, the sweeping consolidation of public finances during António Costa’s term, as well as sound macroeconomic fundamentals, give the future government considerable economic and fiscal leeway. Portuguese growth is expected to remain well above Eurozone growth in 2024 (standing at 1.2%, according to the European Commission, compared to 0.7% for the Eurozone).
The economic outlook in the UK is still challenging. After a year 2023 marked by a gradual deterioration in activity (a slowdown in the first half of the year, followed by a contraction in the second half), GDP growth is expected to remain slightly positive in 2024. With the general election, scheduled to be held at the end of the year, Prime Minister Rishi Sunak, who is facing difficulties within the Conservative party, is struggling to reassure households who are bearing the full brunt of rising costs of living and interest rates. Despite a recovery in purchasing power and the resilience in the labour market, private consumption remains depressed
2023 closed on a note of hope, with expectations of rate cuts and signs of stabilising, perhaps even improving confidence surveys. This hope has not dissipated in the early weeks of 2024. In the absence of a new shock, inflation seems to be on course for a return to the 2% target. This opens the way to the first steps in monetary easing, expected in the second quarter. These twin falls, in inflation and interest rates, and the encouraging pattern in the bulk of the economic data, fuel the expectations of a soft-landing scenario. But this is not to say that there are no risks or points worthy of continued attention. Geopolitical tensions remain high and capable of disrupting this scenario, most notably through their inflationary effects
The possibility of a US recession triggered by monetary tightening is looking less and less likely given the resilience of an economy that continued to grow by 0.8% q/q in Q4 2023 and by 2.5% on average over the year. Our central scenario is now that of a marked slowdown albeit without an economic recession in H1 2024. The Federal Reserve can now look forward to a soft landing and consider rate cuts in 2024 – a year in which political events will take centre stage.
The post-Covid recovery in China’s economic activity was not as strong as expected in 2023. The property sector crisis seemingly deepened further at the end of the year, the demand for housing did not pick up again despite support measures from the authorities, and weak household confidence weighs on private consumption. Conversely, the export-oriented manufacturing sector has performed better than expected over the past few months, in contrast with the performances of domestically oriented sectors.
Faced with a natural disaster and a political crisis, 2024 is off to a rocky start for Japan. However, the economic impacts of the earthquake that struck the country’s west coast on 1st January 2024 are expected to be fairly limited due to the authorities’ effective preparations and quick response in dealing with this type of event. After an expected growth of +0.4% q/q in the fourth quarter of 2023, activity should slow in the first quarter of 2024, although it will remain positive at 0.2% q/q. The fall in inflation and bond yields at the end of 2023 is providing some breathing room for the BoJ, which is expected to end its negative interest rate policy in March or April
Eurozone activity is expected to pick up moderately in 2024, buoyed by the fall in inflation and the start of a cutting cycle of policy rates, which, according to our forecasts, will take place in April. The labour market continues to surprise on the upside. However, industrial production is falling sharply and remains highly exposed to escalating tensions in the Red Sea and the repercussions on shipping and supply chains. 2024 will see a number of national parliamentary and presidential elections (Finland, Portugal, Belgium, Austria) and the European elections (6 to 9 June), which are likely to redraw the political landscape in the region and the balance of power within the European Parliament.
The cyclical slowdown in the German economy, which is similar to the one being experienced in the Eurozone, is part of a longer-term stagnation, with Q3 2022 standing out as the last quarter with significant growth. Even so, this figure is biased upwards, as the period benefitted from the post-Covid rebound. While the rise in energy prices was steep enough in 2022 to highlight the clear weaknesses of the German economy, which is specialized on energy-intensive sectors, some of these weaknesses had existed earlier. Against this backdrop, the prospect of a return to growth, which is our scenario for spring 2024, due to the drop in inflation in particular, is still shrouded in deep uncertainty and downside risk.
French growth weakened in 2023, as evidenced by the low figures for the business climate indicators in December. However, 2024 should kickstart the road to recovery. The major drop in energy prices from the levels seen at the start of 2023 will contribute to inflation continuing to fall, which is not expected to be jeopardised by most of the price-cap mechanism still in place for electricity being removed. The upturn in real wages, the healthy state of the aeronautics sector and the continued greening of the economy should enable a soft landing for growth in 2024, with an annual average figure of +0.6%. The expected slight rise in unemployment and the more pronounced increase in business insolvencies pose downside risks, however.
In 2023, the recovery of the Italian economy slowed in a somewhat bumpy way. On the one hand, after supporting the first part of the recovery, fixed investment declined. But on the other hand, consumption surprised on the upside (+1.5% with respect to Q4 2022). Italian households benefited from both a significant improvement of labour market conditions and deceleration of inflation. Consumer confidence recovered, supporting private expenditures. In Q4 2023, inflation marked a decisive slowdown: the declining trend is mainly due to the deceleration of energy prices (up +1.2% on average in 2023 compared to +50.9% in 2022).
In Q3 2023, Spanish growth eased slightly to 0.3% q/q. It was primarily driven by household consumption, which was itself supported by the resilience of the labour market and the increase in real wages. After an increase in H2 (from 1.6% y/y in June to 3.3% in December according to the harmonised price index), inflation is expected to fall again in 2024 and drop below the target of 2% in Q3. We expect growth to remain moderate at the end of 2023 and in early 2024 (0.2% q/q), before returning to positive territory. Spain will remain one of the drivers of the euro area for another year, with expected growth of 1.5% on an annual average versus 0.6% for the euro area.
The country fell into recession during 2023, like in Germany across the border, but 2024 is expected to be better as the future government will have the financial resources to revitalise the economy. A little bit of patience will be needed though for things to settle down. The Dutch economy remains heavily exposed to the global environment, which is very tense at the start of this year.
The Belgian economy looks set to grow at its current trend rate for the next few quarters. Despite a challenging international environment, characterised by restrictive monetary tightening combined with economic slowdowns in key trading partners, the economy has held up remarkably well. Consumer spending, supported by wage indexation, and robust investment are leading the charge. Capex expenditures are directed towards automation and climate transition in the wake of energy and labour costs hikes.
Greece is expected to enjoy economic growth once again in 2024, but activity showed signs of slowing down in the second half of 2023. Real GDP stagnated in Q3 2023 and employment fell by 0.5% q/q. While strong tourism activity, against a backdrop of high inflation, is boosting tax revenue, its impact on real GDP is more muted. The sharp drop in the unemployment rate (which is now below 10%), the drastic improvement in public finances and the decline in public and private debt testify to Greece’s solid recovery, which has been welcomed by the rise in equity and bond markets, and by the sharp tightening of spreads between Greek sovereign debt and the German Bund
The UK economy is flirting with recession. The downturn in activity in the second half of 2023 is expected to continue until spring 2024 before an expected sluggish recovery, which nonetheless will be supported by the Bank of England (BoE) beginning its monetary easing cycle. Despite an uptick in December 2023, inflation remains on its downward trajectory, which is clearly reflected in production prices and CBI surveys. The turnaround in the labour market, which is still muted, is helping to reduce upward pressures on wages. While this is good news for inflationary momentum, it is also weakening private consumption. The BoE has little room for manoeuvre, with an initial policy rate cut expected to occur in June 2024
The combination of rising inflation and the monetary tightening to combat it led the Swedish economy into recession. Declining household consumption and residential investment were the main drivers. Although the situation is not expected to deteriorate further in 2024, this does not mean that a dynamic recovery is to be expected. However, although Sweden is experiencing significant difficulties, it still has many assets to support activity in the medium term.
The rate hikes cycle is coming to an end. The further weakening of economic activity and lower inflation that we expect to see by the end of this year should prompt the Fed, like the ECB and the BoE, to stop raising their policy rates. However, a further tightening cannot be ruled out. Interest rate hikes would not be followed immediately by cuts: to continue the fight against inflation, monetary response is expected to hold policy rates at their current high level for an extended period, until mid-2024 according to our forecasts. The first rate cuts would then occur to accompany the sharper fall in inflation and offset its positive impact on real policy rates. From this point of view, monetary policy would remain restrictive until the end of 2024.
The US economy keeps growing and postponing the occurrence of a recession that is still likely, but not in 2023 and in a circumscribed way. While households’ consumption has so far proven resilient to the monetary tightening, the delayed and cumulative effects should eventually impulse a recessionary dynamic. The first fallout is already visible on the real estate market and the labour market has exhibited signs of easing. If rate hikes are probably over, the restrictive stance is not.
After some hesitation, the Chinese authorities finally stepped up their stimulus measures over the summer. The recent slight upturn in economic growth is set to continue in Q4 2023. However, action by the central bank and the government remains constrained, cautious and measured, while internal and external obstacles to economic activity are still powerful. In the real estate sector, even if activity stabilises in the short term thanks to support measures, it is likely to remain hampered by the financial fragility of developers and weak buyer sentiment.
After sustained growth in H1 2023, driven by external demand, the Japanese economy is beginning to slow down. Private demand (household consumption, corporate investment) is offering little support for growth. Although inflation has stabilised at around 3%, it is eroding household purchasing power, which is still not benefitting from significant wage increases. Nevertheless, according to the Ministry of Finance data, corporate profits hit a new record in Q2. Fostering a better redistribution of profits to wages remains a priority for Fumio Kishida’s government, which is preparing a new wave of budgetary measures in October
Eurozone company surveys (PMI, European Commission) continued to deteriorate throughout the summer, although a slight improvement was observed in September for the PMI. The rise in policy rates by 25 basis points in September – the last one according to our forecast – will amplify this phenomenon. We do not expect a recession in the euro zone as a whole in 2023, but moderate growth at 0.5%, mainly due to a favourable carry-over effect in 2022. After a slightly positive first semester, eurozone activity is likely to stall in the second semester. Significant growth differentials are expected between the Member States.
The German economy is affected by the transmission of the inflationary shock to household consumption. However, the underperformance of the German economy also reflects more structural difficulties, reminding the “Standort Deutschland[1]” debate. These difficulties began in 2018 shortly before the first European regulations aimed at adapting the automotive sector to climate change were implemented. Manufacturing output has never returned to the November 2017 peak and production capacity in the sector has declined. Against a backdrop that is still difficult, we expect another recession in the second half of 2023.
The French economy is characterised by a dichotomy. Household spending – consumption and investment – has decreased in volume (-1.4% and -6.6% in Q2 compared to Q4 2021), while corporate investment has increased (+6.7% between Q4 2021 and Q2 2023). This factor, combined with the reduction in constraints on the production of transport equipment, has enabled high growth in Q2 (0.5% q/q). While these factors should continue to support economic activity in the medium term, growth may be constrained in the coming quarters by the fall in demand against the background of high household savings.
In Q2, real GDP declined by 0.4%, driven by weakening domestic demand. Investment in machinery and equipment fell, reflecting the worsening of firms’ economic and financial conditions. Consumption slightly recovered in real terms. Italian households suffer, however, from both higher consumer prices and increasing interest rates. In Q2, there was a contraction across many sectors. Services value added unexpectedly declined, reflecting the slower recovery of tourism. Inflation is slowly falling: in September it grew +5.7% y/y. Contrary to most predictions, in Q2 2023 house prices increased by 2.0% q/q.
EcoPerspectives is the quarterly review of advanced economies (member countries of the Organisation for Economic Co-operation and Development) and China.
It provides an outline of several advanced economies using indicators for the past quarter and it looks ahead in order to better understand and anticipate the main economic problems of the countries in question.
For EcoPerspectives, economists from the advanced economies team regularly monitor the key economic indicators of selected countries. In particular, our experts use the quarterly forecasts provided by BNP Paribas (for growth, inflation, exchange rates, interest rates and oil prices). Each economist analyses the economic situation of one or more countries, based on the available indicators, in order to see how they change, including the industrial production index, quarterly gross domestic product (GDP) and inflation forecasts, the consumer price index (CPI) and the producer price index (PPI), and employment and unemployment figures. How various stakeholders’ views evolve is also studied and analysed closely (e.g. household confidence and business climate). The author comments on the main factors that influence and determine the economic activity of the country concerned and the economic outlook for the coming quarter.
