The downside risks are increasing for French growth, to the extent that growth could turn out to be lower than the level incorporated by the government in its draft budget bill. For 2023 we estimate that growth could be 1 pp below the government’s assumed figure and that this is likely to imply a limited gap between a deficit of 5.4% of GDP at budget implementation and a level of 5% of GDP included in the draft budget bill. Indeed, the risks appear to be moderate in nature, between a deterioration in the labour market which is expected to remain relatively limited and a cyclical rise in business insolvencies, but at a level which should remain below that of 2019. Moreover, the support of public finances, in particular for purchasing power, remains substantial.
Our households’ property purchasing capacity indicator tracks the development in the maximum purchasable area of a representative household in France. Before rebasing (Q1 2000=100), it compares borrowing capacity expressed as an amount (calculated according to the average household income, fixed interest rates and the average duration of loans) to the price of old housing per square meter. In the provinces, Households’ property purchasing capacity was significantly higher than its 1990–2021 average (+21%) in the second quarter of 2022; however, in Paris, where the long-term average takes into account the 1990 property bubble which had undermined households’ property purchasing capacity, it was almost equal to its 1990–2021 average (+2%)
Since the beginning of 2022, German growth has never ceased to surprise by its resistance, driven by the end of post-Covid catch-up effects. However, the deterioration of the economic situation is now such that all the engines of growth are weakening and fading one by one. In terms of consumption, investment and foreign trade, all followed a downward trend in the fourth quarter. It therefore seems unlikely that German GDP will continue to grow in the last three months of the year. Despite this, the recession that awaits Germany in 2023 is expected to be moderate and time-limited due to massive public support.
Since the start of this year, the European Commission’s industry sentiment survey has seen a significant decline, yet companies continue to report that labour remains a key factor limiting production. This is probably due to order books that remain at record high levels in terms of duration of assured production. Through their impact on the growth of employment and wages, labour market bottlenecks should provide some resilience to consumer spending when the economy is turning down. This support will probably not last however. Hiring intentions of companies have started to decline, which should ease the bottlenecks through a slowdown of employment growth.
Italy is facing an unprecedented and widespread surge in inflation and is unlikely to escape falling into recession this winter. Even though real GDP surprised on the upside in Q3 (+0.5% q/q according to initial estimates by the Italian National Institute of Statistics (Istat)), the barometer clearly indicates that the economic outlook is getting gloomier.
Household wealth -the difference between assets (property, financial) and financial liabilities- matters because in the longer run, it should allow to finance expenditures post retirement. During the pandemic, we have seen in the euro area a big jump in the savings rate as well as an above-trend increase in property prices whereas financial assets suffered from negative valuation effects. The European Commission estimates that, on balance, between the onset of the pandemic and the end of 2021, households accumulated around EUR 2.7 trillion of new wealth in excess of the normal trend. This was considered as a factor of resilience for household spending
For several years, Romania has been running a structural current account deficit. This year, the deficit is expected to worsen and could come close to 10% of GDP after -7.3% in 2021. The deficit had already reached EUR 20.2 billion over the first nine months of the year, well above the figure seen for 2021 as a whole. Romania's deficit is the largest amongst Central European countries. The main reason stems from the deterioration in the energy trade balance, which according to the latest figures reached EUR -4.5 billion for the January-July period. Imports of food and industrial goods have also contributed, but to a lesser degree compared to energy. By contrast, imports of consumer durables have remained soft. Exports were still relatively dynamic (up by a year-on-year rate of 26
Harmonised inflation in the Eurozone surprised again unfavourably in October, reaching 10.7% year-on-year according to Eurostat’s preliminary estimate, compared to the Bloomberg consensus forecast of 10.2%. It was the second month in a row of such a large acceleration in prices (+0.8 points). This was not the only bad news: half of this acceleration can be attributed to core inflation, 0.3 points to food inflation and 0.1 points to the energy component. Inflation therefore continues to spread and to strengthen. While the persistent and common component of inflation (PCCI) seems to have peaked in May this year (at 6.4%), its decline since then (5.5% in September, latest available figure) is not yet visible in the other measures of inflation.
Against all odds, German GDP grew by 0.3% in the 3rd quarter (q/q). This is very surprising because the Minister for the Economy, Robert Habeck, announced on 12 October that “the German economy should contract in the third and fourth quarters of this year as well as in the first quarter of 2023”. Although the detail of the GDP components is not yet available, the national institute of statistics (Destatis) points out that private consumption would have driven growth in the 3rd quarter.
The French economy saw GDP rise by 0.2% q/q in the 3rd quarter, a performance which indicates a high level of activity, following on from the previous positive growth figure in the 2nd quarter (+0.5%). After tourism and catering/accommodation in the 2nd quarter, the positive surprises in the 3rd quarter were corporate investment and manufacturing production. While the automotive sector is one of the sectors that is suffering most from supply problems, which implies a mismatch between production lower than before Covid compared with a strong order book, some of the lag was caught up in the summer, resulting in an increase in manufacturing production (+0.6% q/q), which contributed to significant growth in corporate investment (+2.3% q/q).
Inflation in Spain fell in October for the third consecutive month, from 10.7% in July to 7.3% in year-on-year terms. Although the detailed figures for October will not be available until 15 November, it is likely that, once again, the main driver behind this fall was energy prices, whose pace of increase has slowed noticeably this summer, although remaining high (22.4% y/y in September). The “Iberian exception”, which has been in place since the spring, and the capping of regulated prices on the energy market are paying off. The Spanish government has decided to extend these measures, along with the social bonus which allows electricity bills to be reduced by up to 80% for the least well-off households, until the end of 2023.
With nearly EUR 19 bn released between the start of 2022 and mid-September, a third more than during the same period in 2021, the Spanish National Recovery and Resilience plan is gaining traction. However, some obstacles to its implementation on the ground remain.
In just seven months, the share of floating rates in the total of new loans for house purchase to Italian households has more than tripled, from 15.8% in February 2022 to 60.9% in September 2022. This latest figure has not been seen since February 2015 and, at that time, the share of floating rates was in a period of sharp decline, falling from 81.1% in February 2014 to 37.7% in August 2015. The recent revival in interest in floating-rate loans for house purchase among Italian households is evidently a result of the average increase of 136 basis points (bps) in fixed-rate loans between January 2022 (1.48%) and September 2022 (2.84%). The increase recorded by floating-rate loans for house purchase since the beginning of 2022 has been more modest (55 bps)
After posting negative figures for most of 2021, the credit impulse returned to positive territory in early 2022 and rose to unprecedented levels (+3.8 points in August 2022 and +3.7 points in September 2022). This growth contrasts starkly with the sharp slowdown in the eurozone’s GDP in Q3 2022 (+0.2% quarter-on-quarter, compared to +0.8% during Q2 2022), which it undoubtedly helped to limit. After accelerating hugely since spring, in September 2022, outstanding loans to the private sector showed their strongest increase since December 2008 (+6.9% year-on-year), with outstanding loans to non-financial corporations (NFCs) showing their largest increase since January 2009 (+8.9%)
Inflation has accelerated markedly during 2022. After a limited disinflation during the summer, driven by lower gasoline prices, the inflation rate has reached a new peak in October. Core inflation is accelerating, and expected food and energy price increases are suggesting even higher inflation during Q12023, before a gradual disinflation. In parallel, as wage growth should accelerate moderately, household purchasing power should exhibit a modest increase in 2023.
The latest ECB survey of professional forecasters (SPF) shows a downward revision of the growth outlook and an upward adjustment of the inflation forecast. For next year, the real question is not about the direction of inflation but about the speed and extent of its decline. Slower than expected progress could convince the ECB of the need for more rate hikes than currently priced by markets, implying a bigger output cost of bringing down inflation. Disinflation could indeed take longer than expected. Over the past two years, a variety of factors have led to an exceptionally elevated but also broad-based inflation. Not all shocks have occurred simultaneously and it often takes time for them to work their way through the system, from the producer to the wholesaler to the retailer
According to the latest figures from the European Banking Authority, the ratios of non-performing loans in the Spanish, Italian and Portuguese banking systems reached record lows in the second quarter of 2022. It also appears that their cost of risk remains relatively low following the sharp increase in 2020. However, the cost of risk for Southern European banks is likely to increase again in the coming quarters against a backdrop of a slowdown in economic activity linked to high inflation, rising interest rates and higher energy prices.
The new Italian government, headed by Giorgia Meloni, has come to power in a challenging environment and divisions have already appeared between the various partners of the right-wing alliance. In addition to political dissension, the Italian economic context is also conducive to tension. Most of the barometer’s indicators have continued to deteriorate in recent weeks, both in terms of business and household indices.
The Hungarian forint is amongst the worst performing currencies in Central Europe since January 2022. The forint has respectively lost 11 and 23 % of its value against the Euro and the dollar. The Central Bank of Hungary even intervened last week to shore up its currency. Why is the forint more affected than other currencies in the region? A few explanations below.
Though the manufacturing PMI is a good indicator for assessing the dynamics of industrial production over a long period, recent constraints on supply have again highlighted a methodological problem in the index linked to the way it takes delivery times into account. The way delivery time are handled by the manufacturing PMI must be differentiated according to type of shock, so that the index can better reflect industrial activity. We propose a method that will detect the presence of a positive demand shock or a negative supply shock. The manufacturing PMI is then rectified according to the shock. It is also possible to recalculate the manufacturing PMI by a principal components analysis (PCA), based on all questions available in the S&P Global survey
While the government has already put in place a series of measures totalling 65 billion euros (equivalent to 1.8% of GDP), on 29 September Olaf Scholz announced “a double whammy”, to use his own words, with the introduction of measures to help with the cost of energy, up to a maximum amount of 200 billion euros. It is not expected that the entire budget will be used up; initial estimates suggest that half of the maximum budget would be utilised. This large-scale plan (5.5% of GDP) should make it possible to subsidise electricity consumption for households and businesses (around 80% of their usual consumption) and to maintain a reduced VAT rate of 7% on gas until spring 2024.
The detailed inflation figures for September in Spain confirm the changes in price momentum over recent months. The rise in energy prices, while still very high (22.4% y/y), has eased since last March – at that time the increases had peaked at 60.9% y/y. Conversely, the annual CPI increase for food and non-alcoholic beverages has accelerated (14.4% y/y compared to 6.8% y/y in March). As a result, and for the first time since the outbreak of the war in Ukraine, the rise in the cost of food products has become the leading contributor to inflation, by 3.4 percentage points (p.p.), compared to 2.4 p.p. for energy. However, harmonised total inflation fell from 10.5% in August to 9.0% in September.
Eurozone inflation reached the 10% y/y mark in September, according to Eurostat’s preliminary estimate, the highest-ever reading since the zone’s inflation rate has been measured. Energy prices were a major factor (up 40.8% y/y). In parallel, food prices rose at an increasingly rapid pace, with the harmonised index (also including alcohol and tobacco) up 11.8% y/y in September. Some of this increase in food prices stemmed from the impact of the surge in energy prices on the sector’s production costs. Even so, supply-side constraints linked to production difficulties also appear to have had a hand in this
Due to the recent significant increase in interest rates, Eurozone countries now have a borrowing cost on newly issued debt that, for an equivalent maturity, is higher than that of the existing debt. From a debt sustainability perspective, this necessitates a smaller primary deficit or a larger surplus, depending on whether the average interest cost is, respectively, lower or higher than the long-term nominal GDP growth rate. However, this effect will only be fully operational when the entire debt has been refinanced at the higher interest rate. Given the long average maturity of existing debt, the annual adjustment effort is small for the time being but it will grow over time. However, debt sustainability is about more than keeping the debt ratio stable under certain circumstances
In France, inflation fell to 5.6% year-on-year in September after reaching a high of 6.1% in July, but its decomposition has changed. Food prices (with a year-on-year increase of 9.9% in September) became the main contribution to inflation for the first time (representing a third of the 5.6% figure observed in September), exceeding that of the energy component, the reduction of which owes much to the discount applied to the litre of fuel (which grew from 18 to 30 cents). In 2023, the increase in regulated gas and electricity tariffs will be capped at 15% instead of 120%, which will prevent 5 inflation points (overall), according to our estimates.
