The ECB is still keeping control of things. This was the general message from Christine Lagarde at her press conference on Thursday 12 December. As expected, the ECB cut its key rates by 25 basis points for the fourth time since monetary easing began in June, taking the refinancing rate down to 3.5% and the deposit facility rate down to 3.0%. Inflation forecasts have been lowered slightly, with the forecast brought down to 2.1% for headline inflation and 2.3% for core inflation, before the two measures converge at 1.9% in 2026.
In France and in Germany, a further surge in inflation is expected in November, taking it to 1.8 and 2.6% y/y, respectively, according to our forecasts, compared to 1.6 and 2.4% in October and 1.4 and 1.8% in September (Eurostat harmonised index). Headline inflation is still relatively high due to persistent inflation in services.
The second-last FOMC Meeting of 2024 has resulted in a 25bps cut in the Fed Funds Target Range, to +4.5% - +4.75%. The steps ahead promise to prove trickier for the Fed, as the landing is still pending, and in view of Trump’s win. Indeed, the President-elect’s hostility towards Powell is common knowledge, while many of his policy plans are associated with an increased inflation-risk.
The September FOMC meeting kick-started the Fed’s easing cycle with a significant 50bps cut in the Federal Funds Target Rate, leaving it at +4.75% - +5.0%. Unusually, this large step was taken even as the US economy remains strong, and explicitly with a view to keeping it so. Effectively, macroeconomic conditions having induced a shift in the Fed’s priorities towards the ‘maximum employment’ component of its dual mandate, while still not declaring mission accomplished on the inflation side
We expect September 17-18 FOMC Meeting to result in a 25bps decrease in the Federal Funds Target Rate to 5.0% - 5.25% - barring a huge surprise. This move will launch the beginning of an easing cycle for monetary policy. The combination of improved data and outlook for inflation and the ‘unmistakable’ softening of the labour market leads to a shift in the Fed’s priorities, paving the way for rate cuts. A few thoughts beyond the direction change:
In August 2024, French inflation is expected to fall back below 2% year-on-year for the first time in three years (August 2021). This disinflation is mainly linked to energy prices and is expected to increase further at the start of 2025 for the same reasons (expected drop in electricity prices). By contrast, inflation in services, which has been impacted by an Olympic effect in particular, is expected to remain high in the short term, but will not prevent further disinflation.
In May 2024, cumulative 12-month business insolvencies exceeded 60,000 for the first time since August 2016, according to Banque de France data. This threshold has only been exceeded four times in the past. However, the dynamism of business creations and the specific nature of post-Covid normalisation reveal a clear difference between the recent and previous peaks in business insolvencies.
The ECB’s meeting on 6 June, as well as the statement and press conference that will follow, are very much awaited, not because the outcome is uncertain, but because it should mark the start of the ECB’s rate-cutting cycle. Some points to note.
Q1 2024 saw the household savings rate rise to 17.6% (from 17.2% in Q4 2023), thanks to moderate growth in consumption (+0.1% q/q in volume terms) in Q1 and higher growth in purchasing power (+0.6% q/q). While the savings rate has fluctuated at around 2.5 points above its pre-COVID level (14.6% in 2019) since mid-2021, we expect it to now fall back down to this 2019 level by the end of 2025. Significant support for household consumption.
The publication of the second flash estimate of GDP for the euro area on Wednesday 15 May did not bring any significant change compared to the initial estimate. However, it confirms an encouraging recovery in economic activity. Real GDP in the euro area rebounded by 0.3% q/q, as announced in the previous report, an increase that ends two quarters of slight contraction (-0.1% q/q for Q3 2023 and Q4). Growth was driven by the Baltic economies (Latvia and Lithuania at +0.8% q/q), as well as by the southern European economies, notably Spain and Portugal, which saw their activity expand by 0.7% in Q1, at the same pace as in the previous quarter. Growth strengthened slightly in France (+0.2% q/q) and rebounded in Germany (+0.2% q/q), while Italy was in line with the euro area average.
April could see core inflation (according to the INSEE definition) fall back down to 2%. Disinflation is gradually spreading to more and more items (particularly to manufactured goods and food), resulting in inflation remaining above 2% year-on-year for just half of these items over the first three months of the year.
This week's FOMC meeting followed by the statement and press conference on 1 May 2024 are eagerly awaited considering the change in tone from the Fed in recent weeks, which has signaled that rate cuts will come later than expected.
The publication of INSEE’s business climate survey on Thursday 25 April confirms the prospect of an improvement in demand, which has remained depressed in recent months. Ahead of the publication of important data from 30 April, we anticipate that growth, having remained weak in Q1, should accelerate in Q2, benefiting from the disinflation observed. However, the improvement may not be sufficient to rule out the risk of business insolvencies remaining high.
After two years – 2021 and 2022 – of significant improvement linked to the post-Covid recovery in activity, 2023 marked a halt in the recovery of public finances in the euro area. According to preliminary results published on Monday by Eurostat, the public deficit narrowed in 2023 by only 0.1 point of GDP, to 3.6%. The primary deficit also fell by the same magnitude, to 1.9% of GDP.
In Q1 2024, business insolvencies in France reached nearly 15,000 units. This is only slightly less than in Q4 2023, which was marked by a sharp rise. Although the construction and retail trade sectors are facing a significant increase in the number of businesses affected, insolvencies in these sectors remain below historic highs. On the other hand, records were set in business services and in transport and storage services.
According to our forecast, inflation is expected to have fallen again in March to 2.4% y/y compared to 3% in February, due to the marked easing in food prices. However, French inflation is expected to then remain between 2 and 2.5% y/y until the end of August, due to depletion of the favourable effects linked to the end of inflation on food and manufactured goods and the continuation of inflation on services, before probably falling below 2% in September.
According to our estimate, the trade deficit (on trade in goods) stood at almost EUR 101 billion in 2023, down from 165 billion in 2022, but still up from 86 billion in 2021. This improvement is primarily due to the drop in oil prices and the return to normal of electricity exports and intermediate-good imports. The good news is that the trade balance is also improving in volume terms, albeit to a more limited extent and due to effects that are likely to be one-offs.
The eurozone narrowly escaped economic contraction in the last quarter of 2023, but the picture is mixed among countries. According to preliminary figures from Eurostat, real GDP in the euro area remained stable in Q4, following a slight decline of 0.1% q/q in Q3. Quarterly growth surprised to the upside in Spain (+0.6%), Italy (+0.2%), while the data for France (0.0%) and Germany (-0.3%) were in line with the consensus. The largest decline in the euro area came from Ireland (-0.7%) while Portugal’s growth rose the most (+0.8%).
INSEE has published its business climate survey for January along with its quarterly industry survey. These two surveys reflect a lack of momentum, without marking any further deterioration. Regarding sales prices, the changes observed are encouraging, although recent events in the Red Sea could reverse the trend.
The ECB's latest macroeconomic projections show fairly marginal downward revisions to inflation (headline and core) and economic growth for both 2023 and 2024, compared to the September forecast. With real GDP growth now foreseen at 0.6% on average this year and 0.8% next year, the ECB's projections are slightly higher than ours, currently at 0.5% and 0.6% respectively.
German exports of goods fell in October according to Destatis, continuing the trend seen over previous months. As a result, exports have been contributing negatively to German growth for almost a year, most notably exports to China. However, in October, exports to the European Union fell, after being hit by the decline in growth in the region.
After several quarters of high job creation (89,000 on average between Q2 2022 and Q1 2023), Q3 confirmed the loss of momentum observed in Q2 (37,000 new jobs after 27,000). Payroll employment in construction and the temporary employment sector are contracting. However, industry continues to create jobs (12,000), as do non-temporary trade services (34,000).
The dynamism of French exports has noticeably slowed over the past few months. Although exports over the first 9 months of the year are EUR 14 billion higher than those recorded over the same period in 2022, most of this gain was achieved in Q1. Over Q2 and Q3, the cumulative increase in exports was limited to EUR 1 billion (compared to Q2 and Q3 2022), with aeronautical exports (+5.5 billion) leading the increase.
With +4% in Q3 and +5% in Q2, total business insolvencies over 3 months were, for the second consecutive quarter, higher than their pre-Covid level over the same period, according to preliminary data from Banque de France. Over 12 months, industry, accommodation and catering and real estate are among the sectors with higher insolvencies than before Covid. Overall, the phenomenon is likely to increase with a greater proportion of liquidations than in the past and a higher number of large and medium-sized companies affected by insolvencies.
Q2 saw a marked reduction in job creation. This drop may seem natural in a labour market which quickly overcame the shock from Covid-19 and in the context of more moderate GDP growth (apart from a few exceptions, such as in Q2 2023). However, it reflects the deterioration in certain sector-based dynamics (including construction), although more favourable developments are observed in other sectors, industry in particular.
