Earlier this week, Hungary published its GDP data for the first quarter. It fell by 0.2 % compared with the previous quarter after -0.6% in Q4 and -0.8% in Q3. This is not a major surprise given that high frequency indicators such as retail sales and industrial production were already pointing to a weakening in economic activity. Elsewhere, in the region, GDP growth was also soft though we observe a better performance in Czech Republic Romania and Poland. The Hungarian economy is experiencing numerous challenges while some positive developments provide some relief.
Central banks' decisions influence markets, households and businesses. It is therefore necessary to understand how they will react to incoming data. The Federal Reserve and the ECB have similar reaction functions but offer different guidance because of the differences in terms of economic environment, particularly with respect to real interest rates.
Growth in the French economy recovered slightly in Q1 2023, rising to 0.2% q/q following the relative stagnation seen during the second half of 2022. Despite the strengths driving this recovery, the French economy is also exposed to some weaknesses. An analysis across three sectors (transport equipment (including cars), food and housing), gives us an insight into these conflicting forces which imply that while growth is still positive, it can be very different across sectors.
The current inflationary situation is unprecedented in many respects. Indeed, some of its strength lies in the ability of firms to pass on the rise in their production costs in their selling prices. This is known as pricing power. And it allows companies to preserve their margins in a difficult environment.
Emerging markets exports contracted sharply in late 2022-early 2023, particularly in Asia due to the turnaround in the global electronic cycle. But US/China structural decoupling is probably already at work.
The candidate of the outgoing majority, Bola Tinubu, won a close victory in the presidential elections of February 25. Coming challenges are significant: revive the first African economic power and consolidate macroeconomic stability, which has deteriorated dangerously despite high global oil prices.
The monetary tightening by the Federal Reserve and the ECB has led to a decline of the business climate in the manufacturing sector. The services sector has been resilient thus far. This may reflect the diversity of the subsectors within services, with some being highly correlated with the manufacturing sector and others far less so. Services also tend to be less sensitive to interest rates, which implies a more limited impact of central bank rate hikes. This resilience also influences the evolution of inflation. Services have a high labour intensity and wage developments are a key driver of services inflation, far more than in manufacturing. This complicates the task of central banks in bringing inflation under control.
In Egypt, all macroeconomic indicators are deteriorating. In 2023, economic growth should slow down and CPI inflation reach a high level. Contrary to the other emerging economies, inflation is expected to accelerate in 2023 -notably given the depreciation of the pound- by around 50% for a year.
The currently high level of inflation remains the biggest threat to the global economy, according to the OECD. Granted, we already seem to have passed the inflation peak several months ago, notably in the United States and the Eurozone. But so far inflation has not fallen much. Yet several factors are helping to reduce inflationary pressures. One of these is the ongoing reduction in the supply-demand imbalance: indeed, supply is coming under fewer constraints while they seem to be rising for demand.
Business insolvencies started to increase again in Western Europe during 2022. In the United Kingdom and Sweden, where growth has deteriorated since the start of 2022, these insolvencies were even higher than their pre-Covid level, with a more significant increase in retail and wholesale trade. In the Eurozone, insolvencies are still below pre-Covid levels, but the current tightening of credit conditions raises the risk that they will reach those levels during 2023. This also applies to France, where there is a risk of wider negative consequences, in particular because these insolvencies take the form of liquidations to a greater extent than before Covid.
Coping with uncertainty is at the heart of every investment decision. How investors deal with uncertainty is influenced by the interplay between their conviction level when forming views, the nature of the uncertainty and their decision horizon. It is highly likely that elevated uncertainty shortens the investment horizon: when investors don’t have strong opinions, they will probably adopt a short-term approach (or simply do nothing). Even those with strong views about the medium run -e.g. the risk of recession, which would weigh on equity markets- may opt for a short-term approach when the short-term driver -e.g. getting closer to the peak in policy rates- works in the opposite direction
Since 2005, the emission trading system, also called carbon market, is at the heart of the European strategy to reduce greenhouse gas emissions.This device that covers around 45% of carbon emissions is based on the simple principle of "polluter pays".The entities concerned, mainly the most polluting industrial sites, but also the intra-EU airlines, are given emission allowances by public authorities. These are tons of carbon which they can emit into the atmosphere every year.When they reach the limit, they have to obtain additional rights on the markets or bilaterally. This has a cost. So it is a financial incentive to adopt less polluting production methods based on renewable energies for instance.
The public accounts for 2022 are progressively unveiled by the national authorities, and one observation is emerging for Southern Europe countries (Spain, Portugal, Greece): public finances improved again significantly last year.
The political crisis worsened in Peru over the last two months. In the very short term, political instability should continue, and weigh on the economic outlook.
Despite the still hawkish messages from the Fed and the ECB, markets are already pricing in rate cuts later this year. What explains these seemingly premature rate cute expectations? They could reflect differences in views on the economic outlook, but it is unlikely these would be so big to justify current market pricing. Another explanation is that investors are rationally managing their risk exposure. Investors know that an unexpected dovish twist in central bank guidance would cause a rally in bond and equity markets. They also know that central banks have no incentive to already soften their guidance but that they have the option to surprise, like they have done in the past. The closer we get to the terminal rate, the bigger the likelihood that central banks would change their message
In China, the official PMIs published on January 31st and the most recent mobility indicators show that domestic demand is rebounding faster than expected following the end of the zero covid policy and the re-opening of the country. This trend should strengthen further in the coming months assuming the epidemic curve continues to improve. We now expect economic growth to be slightly over 5% in 2023, up from 3% in 2022.
The French economy is exposed to both negative and positive factors. The recession risk is significant, as inflation acceleration has weighed and should continue to weigh on consumer appetite. However, some factors may drive growth, as e.g. the gradual recovery of their output to pre-Covid levels. Many sectors have already reached this target, but the manufacturing sector (particularly automotive and aeronautics) still experiences various factors limiting their production. If these bottlenecks ease, growth may well surprise on the upside.
Which issues will rule global economy in 2023? After a year of major shocks with the return of inflation and monetary tightening, the time has come to turn to 2023, which should be a two-stage transition year: the first half being under the sign of disinflation and the second half allowing us to anticipate the major trends of 2024 . A real dynamism throughout the year, which will therefore influence the decisions of households, businesses and also financial markets.
The OECD team presents its focus on 2023.The year is starting off with contrasting signs in the eurozone, between hope of disinflation and fear of recession.
The Country Risk team presents its focus on 2023.This year, emerging countries will face a more challenging international environment than last year.Throughout the year, you will be able to read the publications, listen to podcasts and watch videos from the economists dedicated to countries such as China, Brazil, Egypt and India.
Where do we stand regarding the debate on the possible triggering of a wage-price loop in the Eurozone? About six months ago, when the debate first arose, there was some presumption but no tangible evidence that such a loop had been set off. Today, we have first signs that a wage-price loop is underway but in a somewhat normal way and with a limited risk of a problematic spiral.
Europe is still well-placed in the race to adopt more environmentally-friendly lifestyles and to switch over to electric cars, despite being disadvantaged by its higher energy costs.
Economic developments in 2023 will to a large degree be the result of the inflation shock of 2022 and the policy reaction of central banks that followed. Three developments look highly likely: disinflation -in terms of headline inflation- should gather momentum, central bank policy rates should reach their cyclical peak and activity should suffer from the rise in interest rates that started last year, implying that the euro area and the US should spend part of the year in recession. The list of uncertainties is long -the evolution of energy prices and the extent and pace of disinflation are key ones- but there are also several factors of resilience, implying that, all in all, the recession should be shallow.
The latest inflation data in the US were greeted by financial markets because inflation declined more than expected. However, upon closer inspection, the picture is mixed. On the one hand, there is mounting evidence of disinflation (easing of input price pressures, shorter delivery times, decline of goods price inflation) but on the other hand food inflation remains high and shelter is a major contributor to inflation. Prices in certain services rise at a fast pace due to rising wage costs. On balance, this implies that the Federal Reserve will continue to hike its policy rate in the near term and will keep a firm tone thereafter. It will be in no hurry at all to start easing. For that we will have to wait until 2024.
Summary: In November, Anwar Ibrahim became the new prime minister but the political environment remains particularly unstable. However, in the past three years, the Malaysia’s economy has been buoyant and resisted fairly well to successive external shocks. Economic growth is robust. Although public finances are still weaker than before the pandemic crisis, they have strengthened since the beginning of the year.
