Until this summer, the Spanish economy had proved resilient to the interest rate shock. Private consumption and investment were up respectively, 2.7% y/y and 2.0% in Q2 2023. The positive trend in the labour market and the savings accumulated during the pandemic supported household spending, along with the decline in inflation, which allowed purchasing power to stabilise. However, these supports are falling off. Economic activity will slow in H2 2023 but will not come to a standstill. However, with growth now forecast at 2.2% in 2023 as a whole, Spain will remain one of the drivers of the euro zone this year.
Negative revisions to GDP figures have darkened the mood of the Belgian economy. We expect GDP to remain flat throughout the second half of this year as monetary policy does its job. Short-term volatility in inflation numbers looks likely, resulting in a temporary bout of deflation near year’s end. The labour market remains in good health, suggesting a soft landing is in the cards. Successful government bond emissions could tempt some last-minute pre-election spending by the De Croo-government, but the long-term outlook for public finances remains bleak.
The UK economy shows increasing signs of deterioration. An upturn in unemployment is visible, and the PMI employment data fell sharpy in September. The consequences of monetary tightening are spreading and no sector has been spared; first and foremost, the housing market and even the public sector, recently shaken by the bankruptcy of several councils, including the city council of Birmingham, the country’s second largest city. While inflation in the UK is falling, it remains high compared to its European neighbours, notably due to stronger wage increases. However, the Bank of England is not expected to raise the Bank rate again, even though the vote in September (when a hike was expected) was decided by a single vote
In the major OECD economies, the slow pace of disinflation is expected to continue, while the slow slowdown in growth will eventually lead, because of the monetary tightening (particularly rapid and significant), to a recession in the United States and stagnation in eurozone GDP. Various supportive factors should limit the extent of the reversal, but the ensuing recovery would be equally limited. The slow convergence of inflation towards its 2% target would force central banks to maintain a restrictive policy despite the start of rate cuts in the first half of 2024.
The US economy continues to grow and create jobs, albeit at a gradually slower pace, and the Federal Reserve has not quite finished with rate hikes. We continue to anticipate a recession, from Q3 2023 until Q1 2024, under the effect of monetary tightening. Having opted for the status quo in June on the back of inflation continuing to fall and in order to take time to assess the effects of the monetary tightening implemented to date, the Fed is expected to make a final 25 bps increase in July, bringing the Fed funds range to 5.25-5.50%.
China’s economic growth recovered rapidly following the abandonment of the zero-Covid policy, but it is also running out of steam faster than expected. Domestic demand is held back by a significant loss of consumer and investor confidence, and export momentum is stalling. The authorities are cautiously easing monetary policy, and additional stimulus measures are expected in the short term. They should, among other things, aim to encourage youth employment.
Inflation in Japan continues to rise, spreading to all the items in the consumer price index. Inflation expectations remain anchored around the 2% target and price increases should remain at this level in the medium term. We expect the Bank of Japan (BoJ) to raise the 10-year sovereign rate ceiling to 1% in July, before ending its yield curve control policy by the end of 2024. Real GDP grew by 0.7% q/q in Q1 (+2.7% in annualised terms), mainly supported by household consumption and non-residential investment. The return of foreign tourists (+71% q/q in Q1) also enabled activity to rebound after two disappointing quarters. Although slowing, growth should continue in Q2 (+0.5% q/q) and throughout the second half of the year, reaching 1.1% in 2023.
The eurozone entered a technical recession in Q1 2023, with Eurostat having revised lower its estimate of quarterly GDP growth for Q1 from +0.1% to -0.1%, i.e. the same pace of contraction as in Q4 2022. These results do not profoundly change our assessment for 2023: weak or slightly negative economic activity, quarter-on-quarter, although growth for 2023 as a whole should be more positive thanks to the favourable carry-over growth effect. Our current forecasts are based on a terminal refinancing rate of 4.5%, which would be reached at the monetary policy meeting on 14 September. Nevertheless, the scenario of harsher tightening cannot be completely ruled out, given the ongoing inflationary momentum and still high inflation generalisation indices.
Germany experienced a technical recession in Q4 2022 (-0.5% q/q) and in Q1 2023 (-0.3% q/q), driven by a contraction in household consumption (-1.7% then -1.2%). Although the main cause of this recession was not its industrial core, the German economy showed signs of weakness which hindered growth. While disinflation should allow household consumption to recover in Q2, economic surveys however, are pointing to a further deterioration, which once again exposes the German economy to a risk of recession in H2.
After a second half-year 2022 during which growth weakened markedly, Q1 2023 saw a relative rebound, which should be confirmed in Q2: a rebound rather concentrated in some sectors, mainly transport equipment and tourism. However, economic surveys have deteriorated since March, reaching relatively low levels, particularly in manufacturing. Housing, business services and exports are all areas of concern which, taken together, are likely to have a more pronounced negative impact in the second half of 2023, both in terms of growth and job creation, which are continuing for the time being.
Following a mild contraction in the last three months of 2022, Italian GDP rose by 0.6% in Q1 2023. The carry-over for 2023 is +0.9%. In Q1, domestic demand excluding inventories added 0.7 percentage points to growth, while the contribution of both net exports and inventories was negative. Investment rose by almost 1%, reflecting the improvement of economic and financial conditions for Italian firms. Italian households benefited from the strong recovery of nominal income, but still suffered from the purchasing power loss due to inflation. This latter remains among the highest in the euro zone, at 8% y/y in May (harmonised measure).
The drop in inflation in Spain has provided no respite for the coalition in power. The Socialist Party’s losses in the regional and local elections on 28 May to the People’s Party, led Prime Minister Pedro Sanchez to announce a snap general election on 23 July, five months before the originally scheduled date. Despite a still dynamic labour market, the drop in purchasing power and the housing crisis are penalising the party in power, which has fallen even further behind in the polls this spring. The property market is showing signs of a limited correction for the time being, but the continuation of monetary tightening and the resulting hike in lending rates are likely to accentuate this downturn.
At the start of this year, Belgian GDP growth remained at above-average levels. Inflation is currently slowing down alongside the cooling of the labour market. Rising interest rates have started to bite, as real estate spending is already declining, with firm capex to follow suit. A (brief) recession towards the end of the year remains possible but unlikely. Even if it does materialise, a debt-constrained government won’t be of much help, however.
GDP in the United Kingdom rose by 0.1% q/q in Q1 2023. The winter recession heralded in autumn 2022 did not materialise thanks to public investment, the momentum of services and the resilience of industry. This resilience is good news, but is likely to make inflation more persistent in the medium term, while the latest figures once again surprised on the upside. The Bank of England (BoE) will have to continue to raise interest rates. This will impact growth, which is likely to be zero in 2024, after already reaching just 0.4% in 2023.
The recent difficulties faced by some US regional banks have reignited the debate about a potential conflict between pursuing price stability and financial stability at the same time
According to the Atlanta Fed GDPNow Estimate, US growth will remain high in Q1 2023 (annualised quarterly growth rate of 3.2%). News on the labour market front also remains good. Everything would be fine if inflation were not also continuing at a sustained pace, resulting in continuation of the Fed’s rate hikes, the effects of which recently challenged certain banking models. Prior to this, we were expecting the tightening of credit access conditions to lead the economy into recession. Further tightening would weigh even more heavily on activity and ultimately, on inflation. Does this mean to the extent that the Fed will reach its terminal rate faster? This is possible, but the outlook remains very uncertain. Our forecasts for 7 March point to Fed Funds reaching 5
China’s economic activity started to rebound in late January, driven primarily by services and household consumption. Meanwhile, the crisis in the property and construction sectors has subsided. In the manufacturing sector, the growth recovery has remained moderate, hindered by the fall in automobile production and weakening exports. Economic momentum will remain strong in the short term. However, a number of significant downside risks to growth persist.
With alarming inflation across the country, the new governor of the Bank of Japan (BoJ), Kazuo Ueda, will have a baptism of fire when he takes up his role. Even though price increases are expected to slow down during Q1 2023 thanks to government energy subsidies, core inflation has continued to rise this winter. Price dynamics are posing a major challenge and may force the BoJ into making changes to its interest rate control policy, despite bond yields falling off as a result of the recent US bank failures. The Japanese economy stagnated in Q4 2022, buoyed by foreign trade and private consumption during Q4 2022, but slowed by public and private investment. We expect growth to continue in 2023 (1.2%) at a similar pace to 2022 (1.1%), before a more sluggish growth takes hold in 2024 (0.8%)
Even though euro area inflation likely peaked last October, the disinflation process is expected to be slow, with inflation not expected to fall back to its 2% target level before 2025. The most recent macroeconomic projections from the European Central Bank (ECB) all point to this direction of travel. The second wave of inflation is significant, with the HICP excluding energy climbing by 7.9% y/y in March, while further food-price increases are expected for the months ahead. Despite this, economic activity within the Monetary Union is holding up better than expected against the double shock of inflation and interest rate hikes. While a recession is currently being ruled out for 2023, growth is still incredibly fragile
Germany is the Western European country where GDP growth was the most negative in Q4 2022 (-0.4% q/q). Furthermore, economic indicators, although improving, remained relatively downgraded weak at the beginning of 2023. A further contraction in GDP in Q1 2023 therefore remains our central scenario. However, more favourable signals (peak inflation exceededslight disinflation, reopening of China, reduced supply shortages in the automotive sector) could lead to a return to growth from Q2. This has already been reflected in household confidence, although the weakness of growth in the euro area, since Q4 2022, could limit the intensity of this recovery.
The energy crisis was less severe than initially feared during the autumn and winter. This prevented negative growth during Q4 2022 (+0.1% q/q) and provided grounds for relative optimism, as reflected in the rise in the INSEE business climate indicator from December to February. While the growth carry-over naturally led us to revise our growth forecast for 2023 upwards, growth is still low and reflects the sustained downturn in demand, particularly in household investment. In addition, while inflation is expected to decrease, it is still being buoyed by food prices, which, in turn, is adversely affecting household consumption.
In Q4 2022, GDP slightly declined on a quarterly basis. Domestic demand and the change in inventories subtracted 0.4 p.p. and 1.1 p.p., respectively from the overall growth, while net exports added almost 1.5 p.p. The Q4 GDP contraction mainly reflected the moderate weakening of the services sectors that had experienced a strong rebound in the previous six quarters. Despite its Q4 decline, services value added is 1.7% higher than in Q4 2019, explaining about half of the total recovery of the Italian economy. Overall, the 2023 outlook remains positive, with GDP expected to grow close to 1.0%.
The Spanish economy held up better than expected in 2022 (+5.5%), but a slowdown in activity is expected this year. Industrial production is declining, hindered by the energy sector and intermediate goods and services. Investment and private consumption fell significantly in Q4 2022 and will remain under pressure in 2023 from rising interest rates and high inflation. Excluding energy, the rise in consumer prices accelerated further to 8.2% in February. The reduction in the public deficit – greater than expected in 2022 – is making it easier to continue budgetary support in 2023
Belgian GDP remains on a positive growth trajectory, even as monetary-induced clouds are forming. The historically large wage-indexation that benefitted a significant number of workers at the start of the year should spur on consumption in the short run. With disappointing corporate and household-real estate investments, and international trade decreasing, government spending is the only other positive contributor to growth, making for unsustainable public finances.
The UK economy avoided recession in H2 2022 thanks to corporate investment and public and private consumption. Inflation figures in February surprised on the upside and remained at an exceptionally high level, which should continue to erode household purchasing power. As a result, the recession may only have been postponed. We now expect GDP to contract by -0.3% QoQ in Q1, then by -0.2% in Q2 2023. Faced with this situation, the Bank of England (BoE) is not expected to raise its key rate beyond a final hike of 25 basis points in March. This, plus accelerating disinflation, would allow a rebound in growth from H2 onwards.
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.
