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.
August 2023 marks an upturn in inflation in France, which contrasts with the disinflation observed in previous months. Energy is the main cause of this rebound, linked to the rise in regulated electricity tariffs and the increase in fuel prices. In the medium term, the prospect of a positive energy inflation should delay the drop in inflation below the 2% threshold.
The rise in interest rates and the slowdown in activity in the eurozone are still not leading to a turnaround on the job creation front in Spain, quite the contrary.
After inflation, would it be the turn of wages to change gear in Japan? The report published by the Ministry of Health, Labour and Welfare on July 7th shows indeed a notable increase in (scheduled) base wages in May, up 1.0% m/m, the largest monthly increase since the start of current statistics in 1990.
While it might have been hoped that the current drop in inflation would provide a stronger boost to household confidence, this, and consequently consumption, remains constrained. This is due to the impact of rising interest rates on purchasing intentions in both France and Germany.
Non-financial companies’ profit margins increased in the first quarter of 2023 to reach 32.3%, up from 31.9% in the fourth quarter of 2022. French companies continue to benefit from increased pricing power to settle their sale prices.
Continuing the downturn observed in April, INSEE’s business climate indicator fell again in May to 100, the lowest since April 2021. The downturn is widespread and particularly noteworthy regarding the manufacturing sector, where the confidence index even fell to 99, below its long-term average (100) for the first time since March 2021. At the same time, inflationary pressures are continuing to ease.
The Bank of England (BoE) delivered another 25bp rate hike on its May meeting on Thursday, raising its interest rate to 4.5%. The forward guidance has not been revised and is still hawkish and it appears from the Monetary Policy Committee (MPC) minutes and report that the end of the tightening cycle might still be coming.
New factory orders in the industry fell sharply in Germany in March, after a fairly significant increase in February. Overall, these developments are offsetting each other. A very moderate increase over Q1 (0.2% q/q) is consistent with GDP growth, published at 0% q/q for Q1.
The French economy recorded GDP growth of 0.2% q/q in Q1, split between factors of resilience and weakness.
Industry, services: which sectors will bring the other in its wake? This is the question that arises when one observes the current divergence of the S&P Global PMI indices for the euro area
The INSEE business climate indicator saw a moderate downturn in April. This suggests that the upturn seen at the beginning of the year will not last.
The upturn in the INSEE business climate indicator in February was not confirmed in March although, despite the downturn noted, this indicator remains above levels seen between September 2022 and January 2023. Although the March survey highlights forthcoming disinflation, this drop remains relative and is not general. At the same time, we are seeing continued pressure from household demand, with the confirmed weakness of retail trade (excluding automotive) and the renewed deterioration of the business climate in construction.
With a peak in inflation last autumn and fears of energy shortages during the winter, the IFO’s index hit an historic low in October 2022. This index has recovered to normal levels, as winter turned out better than had been feared. However, following the poor performance of Q4, all signs point to this being just a “technical” rebound in activity.
The improvement is evident in the services sector, manufacturing industry and in the automotive retail trade. However, the construction sector is an exception, against a backdrop of a downturn in activity in new housing. Inflationary pressures are expected to increase in the retail sector.
According to our estimate, the trade deficit (goods) reached almost EUR 160 billion in 2022, after 85 billion in 2021. This sharp deterioration is mainly due to the rise in the prices of French energy imports, including oil. However, it seems that the balance on manufactured goods has also continued to deteriorate, including when viewed in terms of volume.
GDP growth surprisingly increased in the 4th quarter, reaching +0.1% q/q (after +0.2% q/q in the 3rd quarter), compared with -0.2% based on our forecast. Corporate investment was one of the factors behind this relative resilience, with a further rise of 1.2% q/q (having already grown by 3.8% q/q in the 3rd quarter). Conversely, consumer spending was undoubtedly the weak link in demand, with a drop of 0.9% q/q.
