GDP growth, inflation, interest rates and exchange rates.
In March, economic conditions in the major OECD economies remained favourable. While in the US, the growth momentum is continuing, Europe is still benefitting from catch-up effects in the energy-intensive sectors (which had slowed down their production during the winter), and in transport equipment (which is benefitting from reduced supply difficulties). This has favoured employment, whose dynamism has improved (probably temporarily) in Europe compared to Q4 2022.
In an interview with the press in 2021, the President of the European Commission, Ursula Von Der Leyen, stated that "growth and CO2 emissions [were] not necessarily linked", citing the European Union (EU) as an example. Since 1990, the EU has in fact reduced its greenhouse gas emissions by 25% while increasing its gross domestic product (GDP) by 60%. Although this is true at the level of the EU-27, it is hardly transposable on a global scale.
After last year’s significant depreciation versus the dollar, the euro has found a new strength. Key factors are the reversal in the current account balance, which after moving into negative territory last year is back into surplus, and, since the autumn of 2022, the narrowing of the 1-year interest rate differential with the US.This reflects the view that the Federal Reserve is approaching the end of its tightening cycle whereas the ECB still has more work to do. We expect that this factor will continue to drive the exchange rate in the coming months. Moreover, there is also a higher likelihood that the Federal Reserve will cut rates before the ECB does
On 5 April, the World Trade Organisation (WTO) released its revised outlook for 2023 and its first forecasts for 2024. It is now projecting world exports in volume to grow by 1.7% this year, up from its October 2022 forecast of 1%. Although this is still a mild increase, the WTO is expecting a rebound in 2024 to 3.2%.
GDP growth, inflation, interest rates and change
In Western Europe, in Q4 2022, the number of business insolvencies returned to levels close to those seen at the end of 2019. This increase conceals national disparities. The United Kingdom and Sweden saw it earlier, as weakening growth and tightening of monetary policy occurred earlier in these countries (and more significantly for the United Kingdom) than in the eurozone. In the eurozone, the increase in insolvencies remains partial, but is likely to continue.The situation in the various sectors reflects these differences. As a result, the increase is almost across all sectors in the United Kingdom and Sweden, particularly in construction and even more so in trade.In France, business insolvencies are approaching their pre-Covid levels but are still 6.1% lower in Q1 2023
Evidence of falling housing prices remains patchy. After a sustained rise throughout 2021, residential housing prices in the main European countries continued to resist the tightening of credit conditions in the fourth quarter 2022, with the notable exception of Sweden and Germany. A generalisation of real estate price declines in 2023 is a significant possibility.
Manufacturing PMI figures were mixed in March. After rebounding in February, new export orders (table 2) dropped in March, due to sharp declines in Vietnam and China, and a slight fall in the United States and the UK. The normalisation of supply chain conditions has also carried over to input 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.
Energy inflation continues to slow as a result of falling prices. Nevertheless, underlying pressures are rising in the euro area, and some alternative measures scrutinised by the ECB – the weighted median and the HICP – reached a new high. In the United States, core inflation slowed slightly in February. However, should the pace of month-on-month increase continue, it will remain in line with an inflation level above 3%. UK inflation (total and core) picked up slightly in March.
The recent difficulties faced by some US regional banks have reignited the debate about a potential conflict between pursuing price stability and financial stability at the same time
Although the latest figures show a few divergences, the overall trend in March is towards a slight reduction in uncertainty.The European Commission’s economic uncertainty index declined slightly in March, continuing its easing trend since October 2022, in the various business sectors. The only exception is household uncertainty, which has picked up slightly.
Recent data in the US show a resilient economy despite the significant and fast tightening of monetary policy. In the Eurozone, the services sector is a source of resilience. Frustratingly for central banks, inflation has also been resilient. This would call for a strong message of further monetary tightening, were it not that uncertainty about the outlook is high. More than ever, central banks need a robust strategy which takes into account a range of possible outcomes. As a consequence, the message from the FOMC has taken a dovish twist. Reading between the lines, the ECB’s message is also softening, as witnessed by the strong emphasis on data-dependency and the role of financial conditions.
International trade data show quite clearly that the slowing of activity has been accentuated over recent months. Global export volumes, have continued to fall, according to the latest figures (December 2022). Health restrictions in China, which were only relaxed in mid-December, weighed on this dynamic. Nevertheless, global exports saw a 2.6% increase over the whole of 2022, relative to 2021.
In February, economic news on the growth front continued to be quite positive in the major OECD economies, while developments on the inflation side were negative.
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.
February S&P Global PMI data provided good news overall. One of the key results is the recovery in China's manufacturing PMI, which reached 51.6, its highest level in eight months (compared with 49.2 in January). This improvement is linked to the gradual recovery in factory production since the lifting of health restrictions. In the eurozone, the figures are mixed down in France, Germany and Austria, but up quite sharply in Spain, Italy and Ireland. In the United States and Japan, the index remained below the 50-point threshold, i.e. in a contracting zone for the fourth consecutive month.
Outlook for GDP growth, inflation, interest rates and exchange rates.
The slight upward trend observed since mid-April 2021 has reversed course since year-end 2022 and early 2023, probably in line with the signs of easing inflation through January. In the United States, business uncertainty concerning sales revenues declined in February for the third consecutive month. In contrast, uncertainty over employment prospects rose reflecting the persistent difficulty of filling job vacancies.
This new publication “inflation tracker” aims to provide an easy-to-read monthly overview of inflation dynamics in the main developed economies. The chartbook includes current price dynamics (consumer and producer prices, and their main contributors), those anticipated by households and businesses, as well as breakeven rates induced from financial markets. The relationship between inflation and some of its main determinants is also included. This first edition of the inflation tracker covers the United States, the Eurozone and the United Kingdom. This document will be expanded over time.
