January's business confidence surveys showed signs of improvement. The composite PMI index points to an expansion in activity (51.5), driven by the ongoing solid performance of the services sector (52.1). The manufacturing sector is also seemingly enjoying a bit more tailwind at the start of this year. After ten months of contraction, the associated PMI is showing signs of recovery (49.2; +3.1 points), with Spanish companies reporting a lesser deterioration of all sub-indices, with the exception of the sub-index relating to suppliers' delivery times (44.5; -3.5 points).
The start of 2024 has seen an unexpectedly strong non-farm payrolls gain, hitting 353,000 in January (+30,000 m/m) – the highest figure seen for more than a year. In addition, this figure was coupled with a significant upward revision to the December data (330,000 jobs created, compared to the initial figure of 216,000). At the same time, the unemployment (+3.7%) and participation (+62.5%) rates remained stable.
The economic situation in the UK continued to deteriorate in Q4 2023. Real GDP contracted 0.3% q/q, after falling 0.1% q/q in Q3. Although economic activity remained marginally in positive territory for 2023 as a whole (with 0.1% growth), it deteriorated throughout the year, resulting in a negative carry-over effect for 2024. The growth outlook for 2024 is even more unfavourable, as economic activity is expected to stagnate in H1 before a sluggish recovery from summer onwards.
Japan entered a technical recession in H2 2023. The first estimate of Q4 GDP indicates a modest contraction of -0.1% q/q following a more significant downturn of -0.8% q/q in the previous quarter. More symbolically, Japan lost its ranking as the world's third largest economy (in nominal GDP) to Germany. Nevertheless, the strength of economic activity in H1 2023 had given the Japanese economy a significant growth carry-over, allowing the average annual growth rate to reach +1.9% for the year (compared to +0.9% in 2022).
The economic picture during November and December reveals some divergence between Europe, on the one hand, and the US and Japan, on the other hand.
The end of the year is shaping up to be a difficult one for the eurozone, as displayed by the flash PMI indicators for December. The composite index, fell by 0.6 points to 47, and remains below the threshold of 50 (in contraction territory) for the seventh month in a row. The employment index has not plummeted, but has been gradually declining since April, reaching 49.6 in December, its lowest level in three years. At 6.5% in October, the unemployment rate in the eurozone stabilised at a historically-low level, which is increasingly looking like a floor. We expect the jobless rate to rise slightly over the next few months, in line with current trends in the PMI indices. The unemployment rate for young people (under 25) has already risen by one percentage point in six months, to 14
The business climate indicators highlight a still deteriorated situation, raising fears of another quarter of contraction in activity (-0.1% q/q in Q4 according to our forecasts), following four quarters of stagnation or decline (including -0.1% q/q in Q3). Indeed, the indices linked to current conditions in the IFO and ZEW surveys remained close to historical lows, in both industry and services. Expectations of a small improvement are based on the anticipation of the ECB’s monetary easing in 2024, which remained uncertain for the time being.
The signs of the French economy cooling down intensified in December, with a further fall in the flash composite PMI to 43.7 (44.6 in November). The manufacturing PMI has been below 50 for 11 months and hit a new low in December, as did the services PMI.
Economic growth is slowing down in Italy. After contracting by 0.4% q/q in Q2, economic activity only grew by 0.1% q/q in Q3, almost standing still in that quarter. This small rebound was led by consumer spending (+0.6% q/q, contribution of 0.4 percentage points) and foreign trade (+0.8 points). Nevertheless, these positive developments were counterbalanced by significant destocking. For its part, investment recorded a quarterly change of -0.1% in Q3.
Contrary to the trend observed in the other three major eurozone countries, Spain recorded a more moderate fall in inflation in November. According to the INE, the growth in the Harmonised Index of Consumer Prices (HICP) slowed by 0.2 pp to 3.3% y/y this month (while the decline reached 0.7 points in France and Germany, and 1.1 points in Italy). Based on recent trends in the producer price index, which recorded its eighth consecutive month of deflation in October (-7.8% y/y), this consumer price slowdown is set to continue, and even accelerate, over the coming months.
The ISM Report on Business showed an improvement in non-manufacturing activity in the United States in November, with the corresponding index rising to 52.7 (+0.9pp). Conversely, the ISM Manufacturing index was stable (46.7), as the improvement in new orders was offset by a deterioration in production and employment. This result is consistent with our forecast of a slowdown in the US economy in Q4, with the GDP growth rate edging down to +0.4% q/q according to our forecast (versus +0.6% for the Atlanta Fed’s GDPNow estimate, and +1.3% in Q3). However, the prospect of a recession is gradually receding, and we now expect a single quarter of contraction in 2024 (-0.3% q/q in Q2, with Q1 expected to be flat).
With the more pronounced disinflation of consumer prices and wages, the Bank of England’s decision to keep the bank rates unchanged at its meeting on 14 December was widely expected. Nevertheless, as in the euro area, the signal for a monetary pivot did not come. In fact, the three members of the MPC in favour of a rate hike in November maintained their position in December.
The revision of Japanese growth figures was unfavourable, resulting in a greater decline in GDP in Q3 than initially estimated (-0.7% q/q versus -0.5% q/q). The downward adjustment is largely due to greater destocking: the negative contribution was increased from -0.3 percentage points (pp) to -0.5 pp. Other significant revisions came from residential investment (from -0.1% q/q to -0.5% q/q), private consumption (0.0% q/q to -0.2% q/q) and public investment (-0.5% q/q to -0.8% q/q). Low household consumption can be explained by the contraction of real wages for the 19th consecutive month in year-on-year terms (-2.3% y/y in October). Overall, private demand reduced quarterly growth by 0.6 pp in Q3.
The range of first estimates of Q3 GDP growth is quite broad, ranging from a very positive figure in the United States (1.2% q/q) to a return to stagnation in Europe (-0.1% q/q in the euro area and 0% q/q in the United Kingdom), after a temporary acceleration in Q2. At the same time, Japanese growth posted a clear correction (-0.5% q/q) after two very positive quarters.
Without falling significantly, confidence indicators for the euro area confirm the current phase of stagnation, which is expected to continue into Q4 2023. According to the flash estimate, the composite PMI edged up by 0.6 points to 47.1 in November, while the European Commission's Economic Sentiment Indicator fell slightly in October, down by 0.1 points to 93.3 (its lowest level in three years). Despite the current deceleration in inflation (from 4.3% y/y in September to 2.9% y/y in October in harmonised terms) and an unemployment rate that is close to its lowest ever (6.5% in September), household confidence is not recovering, against a still difficult backdrop in terms of purchasing power
Germany has just experienced four quarters of stagnation or negative growth, and business climate indicators suggest that economic activity remained broadly depressed at the beginning of Q4: current conditions of economic activity remain close to their lowest levels in both the IFO survey and the ZEW survey (-80 for the latter in November). In line with this depressed environment, production in key sectors (automotive, chemicals and metals) declined again in September (in Q3, it is now nearly 15% below the peak reached at the end of 2017 for each of these sectors). Exports do not drive growth as well (-6% y/y in Q3, trade balance figures in terms of value from Destatis).
The French economy is marked by growing signs of cooling, in terms of economic activity, employment and inflation. While growth has so far remained in positive territory, the INSEE business climate, which fell to 97 in November (compared to 100 between July and September), points to a deterioration. According to this survey, the decline in economic activity already present in part of the economy (housing, food trade) has spread to industry, new construction (excluding housing) and the motor vehicles trade.
Economic surveys remain deteriorated. The PMI indices indicate a contraction in activity that is now more widespread, although the downturn is particularly pronounced in the manufacturing sector. The manufacturing PMI fell by 1.9 points to 44.9 in October, while the services PMI dropped more sharply below the 50 mark, after recording a decline of 2.2 points to 47.7. The household consumer confidence index in Italy is decorrelating from inflation expectations– which have been stable since the spring – and is now falling due to the effect of more subdued economic and employment prospects. In fact, the monthly fall in the confidence indicator (-2.4 points) was the steepest in the last fifteen months
The Harmonised Index of Consumer Prices (HICP) rose again to +3.5% y/y in October (+0.21 pp). Food inflation remains high, although it eased from September (+9.5% y/y in October, -1 pp). However, the surge in olive oil prices persisted (+73.5% y/y, +6.5 pp), contributing 0.37 points to overall inflation. As for energy, the deflation is subsiding but remains significant (-10.1% y/y, -3.7 pp). Core inflation meanwhile, eased to +3.8% over a year.
According to the initial estimate by the BEA (Bureau of Economic Analysis), the United States economy gathered significant pace in Q3, with GDP growth up +1.2% q/q (+0.7pp). This advance, the largest in seven quarters, was driven by strong household consumption (+1.0% q/q), alongside with a significant contribution of stocks (adding +0.3pp to the rate of growth). Conversely, non-residential investment stalled, following two buoyant quarters, under the combined impact of the monetary tightening and the fading of the impulse priorly provided by the IRA and the CHIPS Act.
Consumer price inflation fell sharply in October, from 6.6% y/y in September to 4.6% y/y. Nevertheless, this decrease remains limited by the strong increase in wages, which continue to put upward pressure on services prices. A 5% increase in gas and electricity prices from 1 January has also been announced. In addition, the transmission of interest rates to mortgage interest payments remains significant (+50% between October 2022 and October 2023 according to the retail price index, RPI), and is weighing heavily on households’ financial situation.
The preliminary GDP estimate for Q3 shows a contraction of -0.5% q/q, while the most recent economic surveys have confirmed the slowdown in activity. The composite PMI fell 1.6 points in October, but remained in expansionary territory, standing at 50.5. This deterioration is due to the decline in the services PMI, which was down by 2.2 points (51.6 compared to 53.8 in September). The manufacturing PMI stabilised in contraction zone at 48.7.
Economic surveys in September are sending out mixed signals. Consumer confidence is falling in most countries, which in some cases (France, Spain) underlines a slight rise in inflation. This loss of confidence is also accompanied, in general, by a decline in purchasing intentions for durable goods, which can be linked to high interest rates and an expectation of a moderate downturn on the labour market. Lower consumer demand is affecting companies' order books, with an impact that varies according to sector. In industry, economic surveys are more affected, while in services, activity remains dynamic in the US and Japan, while being more modest in Europe.
The inflation situation, in the Eurozone, is cooling. Added to this good news is the surprising continued drop in the unemployment rate (6.4% in August compared with 6.7% at the beginning of the year). But these positive developments are offset by a cooling also being seen in the European Commission Economic Sentiment Indicator (ESI). Given the weakness of confidence surveys, real GDP growth – only just positive in Q1 and Q2 2023 (+0.1% q/q each quarter) – is expected to be close to zero. We expect nil growth in both Q3 and Q4 2023, a forecast aligned with our nowcast estimate, also at zero.
German inflation resumed its downward trend, after stabilising between May and August (6.4% y/y in August according to the harmonised index), to reach 4.3% in September, due, firstly, to base effects (seasonally adjusted inflation was 2.3% m/m in September 2022, compared to a more normal 0.3% in September 2023). We expect a further drop in inflation of nearly 1 pp in October for the same reason (+1.1% m/m in September 2022 1 pp above the average for October over the last 15 years). Underlying inflation also fell to 4.8% y/y in September after a high of 6.3% in August 2023
