The first hard data for July were relatively good (manufacturing production up 0.7% m/m) in France. Nevertheless, economic surveys point to a deterioration. Insee's business climate indicator was stable at 100 during the last 5 months (from May to September), while manufacturing confidence was below 100 during the last 2 months
Italy is still facing mixed developments but is likely to take advantage of the ongoing decrease of inflation. The Composite PMI weakened to 48.2 (-0.7pp) in August due to a sharp decline in the Services index, which crossed the contraction threshold for the first time in 2023 (49.8, -1.7pp). The Manufacturing sector reported a fifth consecutive month in contraction, despite a slight upturn
The slowdown in activity in the second half of 2023 should be contained: real GDP growth would only decline, from +0.4% q/q in Q2 2023 to +0.3% q/q in Q3, and +0.2% q/q in Q4. The deterioration in the PMI surveys is continuing in both the manufacturing sector and the services sector.
The United States has observed an improvement in the business climate in August, which should postpone the risk of recession for a few more months. The ISM Manufacturing rose by 1.2 pp and reached 47.6. However, the index has been well in contraction territory since November 2022, the longest period since the GFC.
Growth in Q2 2023 was a positive surprise, with an increase in real GDP of 0.2% q/q, driven by corporate investment, and in particular by spending on transport equipment. Nevertheless, signs of deterioration in activity are multiplying and extending to all sectors.
Japanese economic surveys remain positive overall, despite contrasting results for August: the composite PMI was up 0.4 points to 52.6, while the Economy Watchers Survey fell by 0.8 points, returning to its June level of 53.6.
In July, there was still divergence between the main OECD economies. Economic surveys showed signs of a more marked slowdown in Europe than in the United States, where various indicators (non-manufacturing ISM, household surveys) even improved.
Economic activity in the eurozone is showing clearer signs of weakening, and our Nowcast now foresees a stagnation in real GDP in the second quarter of 2023. Retail sales were stable during the first two months of Q2. Survey data also offers little reassurance and seems to indicate a possible relapse in activity in Q3 which we currently estimate at -0.1% q/q: the composite PMI index deteriorated significantly in June, falling below the threshold of 50, to 49.9. The manufacturing sector index fell further into contraction and is now at levels comparable to those seen during 2020, in the midst of the pandemic.
Economic surveys pointed once again to a downturn, including the ifo Business Climate Index (88.5 in June compared to 93.4 in April) and the ZEW Indicator of Economic Sentiment (-14.7 in July compared to 28.1 in February). The erratic momentum of factory orders, which were up 6.4% m/m in May (after a low point in April 2023 not seen since May 2013), underlines one of the constraints at work: the irregularity of activity in transport equipment, which remains subject to sporadic supply difficulties. This phenomenon is generating high volatility in production, both in the aeronautics sector and the automotive sector (lower in April with an upturn in May, as also seen in France).
The downturn in economic surveys highlights a drop in demand (contraction of balance of opinion on global and export order books), particularly in the manufacturing sector. The sectors most sensitive to the economic cycle (chemicals, plastics, metals, packaging, wholesale trade and transport services) are all experiencing a marked drop in their synthetic confidence index. In the construction sector, the balance of opinion on the activity in new housing fell again to -22.5 in July (-10.7 in April). By contrast, leisure-related services, information-communication, transport equipment and part of the construction sector (new building excluding housing, maintenance-renovation) are still growing.
Real GDP growth should halve in the second quarter compared to the previous quarter, at 0.3% q/q, before a further slowdown in Q3. Industrial production (down 0.5% over the first two months of Q2) and retail sales (slightly up by 0.1%) demonstrate the fragility of activity in the country. The composite PMI for new export orders also continued to deteriorate in June (-4.4 points to 43.3).
Economic activity in Spain remains dynamic. The fall in inflation, combined with employment gains this year, constitutes significant support for activity, which will counteract the increase in mortgage payments faced by some households. We now anticipate stable and moderate growth in activity at 0.4% q/q for the second and third quarters of this year. Retail sales in volume terms recovered in April (+4.1% m/m) before edging back down the following month (-0.4% m/m). Tourism activity in the spring suggests a summer season that will be, if not exceptional, at least as successful as 2019, which has been a record year to date: in May 2023, several indicators (number of foreign tourists entering the country, hotel stays) were above the levels recorded in the same period in 2019.
Although in May, the business climate might well have suggested a future recession, in June, things looked less clear. Admittedly, the further drop in the manufacturing ISM, to 46 in June, brought it to its lowest level since the 2008 crisis (excluding the Covid period). However, the message conveyed by the non-manufacturing ISM was noticeably different, with a rebound to 53.9 in June, compared to 50.3 in May.
The UK economy contracted in May (-0.1% m/m) according to the ONS, after growth of 0.2% m/m in April. The services sector stagnated, while industrial production and construction fell by 0.6% and 0.2% m/m respectively. According to the June PMI survey, activity increased in the services sector, but decreased in the manufacturing sector. While the extra bank holiday for King Charles III’s coronation probably contributed to the downturn in activity in May, the UK economy remains in a more extended slowdown phase. The economy stagnated indeed on average over 3 months in May.
The Japanese economy continued its post-pandemic recovery in May and June, although this remains fragile. According to the final estimate for May, industrial production contracted by 2.2% m/m but increased by 4.2% year-on-year. At the same time, activity in the tertiary sector grew by 1.2% m/m and 1.8% y/y. The latest PMI survey also indicates that economic activity expanded in June (composite index in expansion at 52). Nevertheless, a distinction must be made between the manufacturing sector index, which fell back into the contraction zone (49.8), and the services index, which continued to grow (54), although at a slower pace than in May.
In June, the main OECD economies experienced divergent trends, raising the question of the tipping point between a situation where growth continues – with inflationary pressures requiring further monetary tightening – and another where it slows down further and where the fall in inflation means that an end to rate hikes can be envisaged.
Initially estimated at +0.1% q/q, growth in the eurozone in Q1 2023 is now slightly negative, at -0.1% (after a similar drop in Q4 2022). This downward revision was driven by that of German growth. The succession of two quarters of decline in GDP defines a “technical” recession, which it is at this stage: the contraction in GDP is small and it is not broad-based to all growth components neither to all the Member States.
Business climate indicators in Germany have deteriorated in recent months, including the IFO survey (91.7 in May, 5 points below its long-term average, compared to 93.4 in April) or the ZEW index. The latter recovered slightly in June (-8.5 compared to -10.7 in May) but remained very negative and continued to deteriorate in most industrial sectors, as a result of a fall in demand (the current situation index fell at the same time from -34.8 to -56.5 between May and June).
French economic indicators point to a slowdown in growth. INSEE’s business climate in the manufacturing industry has deteriorated. It stands at 101 in June, below its average level during the Q1 (104) and was in May (99) below its long-term average (100) as well as wholesale trade (94) and non-automotive retail trade (94). In particular, the balance of opinion on order books in the manufacturing sector was in June (-17) below its levels observed in December (-15) and March (-13).
The Italian economy surprised positively in the first quarter of 2023, with real GDP growing by 0.6% q/q. However, we expect this good performance to be followed by a slowdown in the second quarter and then a one-off contraction in the third quarter.
Despite the support of tourism, which has been at levels close to those of 2019 since the beginning of the year, the effects of the rise in interest rates and the drop in household purchasing power on the Spanish economy should worsen over the course of the year.
According to the Federal Reserve Bank of Atlanta's GDPNow estimate, US growth stands at +0.5% q/q in Q2 2023, a figure slightly higher than our forecast (+0.4% q/q) and slightly better than Q1 (+0.3% q/q). As Q1 growth was largely driven downwards by the negative contribution of inventories (-0.5 pp), we can expect a more favourable development in Q2. Although a further decline in residential investment is hardly in doubt (it would be the 9th in a row), the resistance of household consumption and non residential investment will be closely scrutinised.
British economic activity recovered by 0.2% m/m in April. This recovery follows a 0.3% m/m contraction in March. This should be put into perspective since monthly GDP remains 0.1% below the level reached in January and February. The services sector returned to growth (+0.3% m/m) after two months of contraction.
Real GDP growth rose in the last two quarters in Japan, but is still slightly below 2019 levels. However, a slowdown in activity is expected from Q2 and until the end of 2023.
In April and May, there was a relative deterioration in the main OECD economies, with some divergences in the magnitude and extent of this deterioration across the economies. In Europe, the deterioration observed in the manufacturing sector over the past few months is beginning to spread to services, where confidence indices have begun a downward trend. In the United States, the ISM non-manufacturing rose moderately in April, compared to an ISM manufacturing index below 50 for the sixth consecutive month.
