During the press conference following the latest governing council meeting, Christine Lagarde insisted repeatedly that moving to a 50 bp rate hike versus 75 bp previously did not represent a pivot, adding that rates still have to rise significantly and at a steady pace. Consequently, the likelihood of a terminal rate higher than 3.00% has increased, which explains the jump in bond yields. The large upward revision of the inflation projections is probably another factor behind the hawkish message. Forecasting inflation several years into the future is a difficult task, even more so in the current environment
In its second estimate, the Spanish statistical institute (INE) raised slightly the harmonised inflation rate (HICP) for November from 6.6% y/y to 6.7% y/y. This is still a significant decline from the 10.7% y/y figure reported in July, as Spain now reports the smallest rate of inflation in the Eurozone.
It seems highly likely that for the eurozone, 2023 will bring an easing in inflation, a contraction in GDP and a peak in the ECB’s policy rates. The uncertainties lie in the scale of disinflation and of the recession, and in the level and timing of the peak in rates. According to our forecasts, the fall in inflation will be rapid on the surface (with headline inflation dropping from around 10% y/y in Q4 2022 to 3% in Q4 2023), but this will mask a slower fall in core inflation, which we expect to remain above 2% in a year’s time, from 5% at present. In the face of this persistent inflation, we expect the ECB to hike its deposit rate by 100bp, to 3%, by the end of Q1 2023 and then maintain this restrictive level throughout the year, despite the recession
Unexpected to say the least, +0.4% growth in German GDP in the third quarter should not distract from the bigger picture. While the power of the end of catch-up effects surprised the consensus which did not expect such dynamism in activity in the third quarter, there is no doubt that German growth drivers are fading one by one under the weight of an extremely unfavourable economic climate: record inflation, energy crisis, drop in global demand... After a last stand in Q3, it therefore seems unlikely that Germany could continue to post positive growth over the last three months of the year. While Germany’s entry into recession is almost confirmed, the question of how intense it will be is much more up in the air
The figure zero should define French growth in 2023. The carryover should be zero, due to a second half-year 2022 in which the positive performance observed in the third quarter should be cancelled out by negative growth in the fourth quarter (with a key contribution of a further drop in household consumption). The quarterly growth momentum recorded in 2023 is not expected to provide any further support. A further contraction in GDP is expected in the first quarter, mainly due to a further acceleration in inflation and the probability of lower inventories in companies. The upturn expected to occur from the second quarter should be moderate, limited to offsetting the drop in the first quarter
During the summer, the Italian economy continued to show a strong resilience against increasing uncertainty. In Q3 2022, real GDP rose by 0.5% q/q, benefiting from the recovery of services, while both manufacturing and construction suffered. Domestic demand more than offset the negative contribution of net exports. A wind of growth continues to blow on the Italian real estate market. In Q2 2022, residential sales recorded a +8.6% y/y growth, while house prices in the same quarter grew by 5.2% y/y. Although the carry-over for 2022 is 3.9%, the outlook for the Italian economy has become more uncertain. Households suffer from high inflation, with purchasing power declining, while firms have to cope with increasing costs of production.
Spain is now the eurozone country with the lowest inflation rate, standing at 6.7% in November. Government measures to curb the rise in energy prices are paying off, although the underlying CPI is still rising significantly. The slowdown in inflation is expected to continue in 2023, but the government will keep on providing significant support to the economy. The 2023 budget, discussed in parliament, extends most of the support measures until the end of next year. Faced with the rise in mortgage rates, Madrid eased repayment conditions for households via loan restructuring facilities while allowing for a temporary freeze on monthly payments
Belgian GDP avoided a dip in Q3, but our present forecast suggests Q4 could be worse. A short and shallow recession looks likely as record-shattering inflation is expected to gradually abate throughout 2023. Consumer spending and corporate investment remain sluggish, but the negative impact of energy prices on household budgets looks more limited than many had feared. Active government intervention played a big part here, but fiscal consolidation remains necessary.
After dynamic business activity during the first six months of the year, Austrian growth slowed very dramatically during Q3 2022, due to the economic downturn both nationally and internationally. GDP is not expected to rebound over the final months of the year and is even poised to stagnate in 2023. However, the downturn in business activity has not stopped the government from announcing an ambitious reduction in the public deficit, which would fall below 3% from next year. This would result in a sharp decrease in the public-debt-to-GDP ratio. These commitments appear to be credible, as the incumbent Green President, Alexander Van der Bellen, was easily re-elected on 9 October, offering political stability to the country following the debacle of the 2016 election.
Despite the significant rise in inflationary pressures, the Greek economy continued to grow quickly during the first half of 2022, at a rate of 4.1% over the period. Nonetheless, real GDP fell back 0.5% q/q in Q3 despite tourism activity holding up well and the labour market being resilient. Indeed, the unemployment rate dropped during Q3 2022 (-29k), hitting its lowest level since December 2009. Almost 80% of the rise in unemployment recorded during the economic crises in 2008 and 2011, which ran from autumn 2008 to spring 2013, was wiped out. As a result, even though it is still very high, the unemployment rate fell below 12% in October (11.6%)
Up until now the Danish economy has continued to impress, with a strong post-Covid rebound which has propelled its GDP well above its pre-crisis level, but the future now looks a lot less bright. If inflation had not yet been able to fully undermine household purchasing power due to significant job creation and a level of over-saving which helped to mitigate the impact, these one-off shock absorbers are coming to an end and real household income is expected to fall over the coming quarters. The government is remaining relatively impassive in the face of this brutal shock and the fiscal response remains very limited, with public accounts that are in surplus and likely to remain so. Public debt should converge towards only 32% of GDP by 2024..
The construction output index is defying the most pessimistic outlook. In October, it reached its best level since January 2021, up 1.1% month-on-month and 2.6% year-on-year, while new orders are eroding. However, the cumulative order books (8.7 months according to INSEE, close to the historical level of 9 months) remain substantial and their implementation is lagging behind.
Meeting the European Union’s climate-related and digital ambitions will require a huge additional annual investment effort. In the near term, against a background of slowing growth and the prospect of a recession in 2023, this represents a potential source of resilience. In the medium term, this demand impulse may underpin or even increase inflation, in addition to other factors that could lead to greenflation. This would influence the level of official interest rates as well as long-term interest rates. The latter could also be under upward pressure due to the huge additional financing needs compared to the normal financing flows. The financing mix -banks versus capital markets- plays a key role in this respect.
The economic landscape is not improving much in Germany. November’s economic surveys confirm that the German economy is not just facing a slower pace of growth, but is indeed getting bogged down. Although the country’s composite PMI was up slightly (46.3 from 45.1), it remained at a very low level, well below the theoretical threshold for expansion. On the other hand, activity in services, which had been a key driver for growth in the third quarter, fell significantly with a PMI published at 46.1 in November, down for the fifth consecutive month.
The first indicators available for October, both for household consumption and for industrial production, suggest that GDP growth would have entered into negative territory at the start of the fourth quarter. Our scenario is based on -0.3% q/q. Household consumption fell 2.8% m/m in October, penalised by the acceleration of inflation, particularly in food. This negative effect was compounded by the impact of fuel shortages, which reduced the presence of consumers in shopping centres in the middle of the month. Finally, two-thirds of the very sharp drop in energy consumption (energy, water and waste items) of 10
The latest European Commission surveys indicated an encouraging upturn in Italian households' confidence, which nevertheless remains very low. The confidence index improved by 8 points in November, the strongest monthly increase recorded by the survey since its inception in 1985. Consumers’ anticipations on inflation were less negative (the second biggest monthly drop since 1985) and clearly supported this renewed optimism.
Following in the footsteps of the US inflation figures for October, Eurozone inflation also surprised favourably by coming in below estimates. Eurostat’s flash estimate of an annual rate of 10% in November was lower than the consensus figure of 10.4%. This raises hopes that Eurozone inflation has finally peaked, and indeed this looks likely. It is our scenario, but considerable uncertainty remains and caution is required.
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.
