In Q1 2024, the Italian economy slightly accelerated. Real GDP rose by 0.3%, with a mixed evolution by sector. Valued added of construction rose, while that of manufacturing declined, suffering from the slowdown of exports. Services increased moderately, benefitting from the recovery of tourism. Domestic demand contributed positively to the overall growth and households profited from the improvement of labour market conditions. Economic and financial conditions of firms further improved. In Italy, in the first five months of 2024, on average, the consumer price index increased by less than 1% y/y per month.
In Q1 2024, Spanish real GDP growth was, as expected, one of the highest in the euro zone (+0.7% q/q). It was mainly driven by foreign trade (contributing +0.5 pp), which was directly supported by the record tourism figures recorded at the start of the year. In the second quarter, we expect activity to remain strong (+0.7% q/q) due to a gradual recovery in private consumption, continued growth in exports, and support for investment from future disbursements of NGEU funds.
The Dutch economy was confronted with a new decline of its GDP in the first quarter of 2024, due to an unexpected drop in exports. The future does not look too gloomy though, since a new coalition was formed and presented friendly purchasing power measures that are likely to support private consumption. The agreement however plans to limit the budget deficit to 2.8% of GDP through spending cuts which could deteriorate the country’s productivity in the longer run.
Belgian economic growth remains close to trend rates, even as a shift in the underlying drivers is taking place. Corporate investment rebounded from last quarter’s one-off dip. More encouraging is the bottoming-out of household investment in dwellings. Real estate prices have remained on an upward trend throughout the ECB’s now ended hiking cycle and the depressed activity levels are expected to slowly recover. Public finances remain a challenge, as the spectre of prolonged government formation talks once again casts a shadow over the Belgian economy.
After being in recession in 2023 (-0.8% on an annual average), due to falling investment, high inflation and the decline in real wages, Austrian growth is expected to remain weak this year (+0.3% according to the European Commission). In Q1, real GDP grew by just 0.2% q/q, still dragged down by the decline in investment (-4.7% q/q, contributing -1.1 pp to growth), but nevertheless pulled up by the rebound in private consumption (+0.8% q/q, contributing +0.4 pp), itself supported by the return of real wage increases and the resilience of the labour market.
The Greek economy is proving resilient to rising funding costs and geopolitical tensions in Europe. The country is expected to post economic growth once again above the eurozone average in 2024. Real GDP grew by 2.0% in 2023 as an annual average and by 0.7% q/q in Q1 2024, driven by private consumption and investment. Except in real estate, inflationary pressures have eased and fuelled purchasing power gains which, with rising employment, are supporting private consumption, the weight of which in GDP reached a new record in Q1 2024 (76.9%). Because of its size and dependence on the external market, the country nevertheless remains very exposed to economic developments in Europe as well as to the energy market, and oil in particular.
In 2023, Denmark experienced dynamic and above-expected economic growth, in the form of an illusion given the preponderance of the pharmaceutical sector. This sector turned into the country’s main asset, to such an extent that fears of increasing dependence have appeared. Furthermore, inflation has fallen significantly since the 2023 high, while the Danish central bank is expected to continue to ease policy in line with the ECB.
In this Audiobrief, Stéphane Colliac discusses selfemployment in France. It has been growing again for almost 20 years, particularly in household services, but also in business services. In France, which has created nearly 420000 jobs a year over the last 5 years, self-employment has represented almost one job creation out of 5
Like their number, the economic weight of corporate bankruptcies has increased to an unprecedented extent since March 2022, starting from an all-time low in 2021. This ratio compares the outstanding amount of bank loans to newly bankrupt corporates to the total outstanding amount of bank loans to corporates (in difficulty or not). These developments are mainly due to the continued catch-up of corporate bankruptcies. This concerns more fragile corporates whose would have already gone bankrupt in the absence of the economic and health measures put in place in response to the COVID-19 pandemic. Furthermore, the repayment of State-Guaranteed Loans does not seem to have an excessive impact on the financial situation of the majority of corporates that have benefited from them
In recent weeks the guidance from several ECB Governing Council members had become increasingly clear that the June meeting would see its first rate cut in this cycle. Against this background, not acting was out of the question, despite the uptick in the latest inflation data.
Following the first rate cut at the June meeting of the ECB, the focus has now shifted to the timing and speed of further reductions in the deposit rate. The guidance is vague: decisions will be data-dependent. For investors, estimating policy rules -the relationship between past decisions and inflation and other relevant variables- has merits to get a better understanding. Such a rule shows the key role played by the difference between observed inflation and the inflation target. However, there are important caveats. The estimated rule implies a very slow adjustment of the deposit rate, which is difficult to justify when the ECB is in easing mode
In May 2024, cumulative 12-month business insolvencies exceeded 60,000 for the first time since August 2016, according to Banque de France data. This threshold has only been exceeded four times in the past. However, the dynamism of business creations and the specific nature of post-Covid normalisation reveal a clear difference between the recent and previous peaks in business insolvencies.
On 5 June 2024, Eurobank Ergasias Services and Holdings, National Bank of Greece, Alpha Services and Holdings, and Piraeus Financial Holdings (in that order the first to fourth largest Greek banking groups by CET1 capital) were authorised by the European Central Bank to pay out a weighted average of 24% of their 2023 net income attributable to Equity Holders. This payout, totalling EUR 875 million, 93% of which is in the form of dividends, is the first of its kind since 2008 for these banks, which between them account for some 90% of the Greek banking system’s total assets.
After a long period of decline from the late 1940s to the early 2000s, self-employment has been on the rise once again in France for almost 20 years. This resurgence of self-employment, initiated by tax incentives in favour of home-based employment or craft industries (non-market services, domestic services, building crafts), was also fuelled by the outsourcing by companies of certain tasks (for the purpose of controlling costs on non-essential activities, incubating innovation) and the emergence of new needs (in particular in terms of maintenance and renovation in building)
Europe is experiencing a losing trend in market share, due to the growth of other producers (Japan in the 1980s, China subsequently). In Germany, it even increased after the Covid-19 pandemic (-0.7 points in 2023 compared to 2019). The German chemical industry has been hit hard by rising energy prices and increasing competition from China and the US. Its automotive industry (which accounted for 17% of its exports in 2023) is suffering directly from Chinese competition.
Speaking at a joint press conference in Germany on Tuesday, 28 May 2024, the French President and German Chancellor expressed their desire to create a “European savings product” to “bolster Europe’s competitiveness and growth”. This political will follows on from the Letta[1] and Noyer[2] reports and statements made by the French Minister of the Economy. It’s a new approach to getting Capital Markets Union back on the rails.
The ECB’s meeting on 6 June, as well as the statement and press conference that will follow, are very much awaited, not because the outcome is uncertain, but because it should mark the start of the ECB’s rate-cutting cycle. Some points to note.
Q1 2024 saw the household savings rate rise to 17.6% (from 17.2% in Q4 2023), thanks to moderate growth in consumption (+0.1% q/q in volume terms) in Q1 and higher growth in purchasing power (+0.6% q/q). While the savings rate has fluctuated at around 2.5 points above its pre-COVID level (14.6% in 2019) since mid-2021, we expect it to now fall back down to this 2019 level by the end of 2025. Significant support for household consumption.
If there could still be any doubt, Philip Lane's latest statements will, on the face of it, confirm a first cut in the ECB’s policy rates at the next monetary policy meeting on 6 June. The current trend in euro-zone inflation is giving space for the ECB to initiate monetary easing, even though new upward pressure on prices are emerging. Inflation fell marginally in April from 2.43% y/y to 2.37% y/y, while core inflation decreased more sharply from 2.95% y/y to 2.66% y/y. The likely return of a positive contribution from the energy component in May (after twelve months in negative territory), an upward momentum in services prices (the 3m/3m annualised rate rose back above 5%) and annual growth in negotiated wages, which were on the rise once again in Q1 (4
The underperformance of German growth in recent years continued in 2023. However, even though it is no longer a driving force, the German economy is seemingly benefiting from the recovery seen elsewhere in the Eurozone, which could boost its growth in the coming quarters. This was reflected in a relatively good performance (0.2% q/q) in Q1, which, like the Eurozone's performance (0.3% q/q), surprised on the upside. The business climate (IFO) shows an improvement, albeit still partial, with an index of 89.3 in both May and April, making them the best two months since May 2023.
French growth surprised on the upside in Q1, hitting 0.2% q/q as a preliminary estimate, supported by household consumption and business investment in services. Our forecast for Q2 is for more of the same (our nowcast, at 0.3% q/q, even suggests an upside risk), confirming the return to slightly stronger growth, after a second half of 2023 at +0.1% per quarter.
Disinflation is back in Italy. After rising slightly in March (1.2% y/y; +0.4 pp over one month), inflation fell back below the 1% mark in April (0.9% y/y), mainly due to the still significant deflation in the energy component (-12.2% y/y). Although it is falling, inflation in services remains strong (+3.1% y/y; -0.2 pp over one month), keeping core inflation at 2.2%. Nevertheless, disinflationary trends in consumer prices are set to continue, with the evolution of production prices still negative (-9.6% y/y in March).
Unsurprisingly, the Spanish economy remains positive at the start of the second quarter. After outperforming eurozone countries with growth of 0.7% q/q in Q1, activity should stay strong in Q2 (0.5% q/q according to our forecasts).
In this Audiobrief, Guillaume Derrien discusses recent evolution of the European Union's trade balance. The latter moved back to a surplus in 2023. Despite China’s ramping up to higher value-added sectors, the EU trade surplus in traditionally buoyant industries (pharmaceuticals, automotive) remains at historically-high levels.
The publication of the second flash estimate of GDP for the euro area on Wednesday 15 May did not bring any significant change compared to the initial estimate. However, it confirms an encouraging recovery in economic activity. Real GDP in the euro area rebounded by 0.3% q/q, as announced in the previous report, an increase that ends two quarters of slight contraction (-0.1% q/q for Q3 2023 and Q4). Growth was driven by the Baltic economies (Latvia and Lithuania at +0.8% q/q), as well as by the southern European economies, notably Spain and Portugal, which saw their activity expand by 0.7% in Q1, at the same pace as in the previous quarter. Growth strengthened slightly in France (+0.2% q/q) and rebounded in Germany (+0.2% q/q), while Italy was in line with the euro area average.
