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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.
Global PMI indices improved slightly in January but remain at a very low level and cannot be taken as a sign of global activity regaining momentum at the start of 2023.
"España Digital 2026", “Estrategia Española de Ciencia, Tecnología e Innovación 2021–2027” and “España 2050”: since the pandemic, there has been no lack of structural programmes designed to increase the competitiveness of the Spanish economy. The Spanish Government is right: the country's fundamental problems, which contributed to the 2011 crisis, persist today. Spain has one of the lowest levels of private and public investment and one of the lowest stocks per capita of productive capital in Europe. In addition, the country still suffers from a significant productivity deficit when compared to its major European partners, a deficit which it is struggling to make up as it is intrinsically linked to its low capital stock
The obstacles which the Italian economy is facing remain significant. Unlike its European neighbours, inflation in Italy is not slowing down. It fell only slightly in December, from 12.6% to 12.3%, and remains the highest in Western Europe. While the Italian labour market continues to recover given the fall in the unemployment rate, this indicator masks underlying dynamics which are less positive for economic growth.
Most of the measures to freeze energy prices will be maintained in 2023 and the Prime Minister Pedro Sanchez unveiled a new budget of EUR 10 bn intended to support households. This will help to contain food price inflation and counteract the upward pressure on prices caused by the end of the fuel rebate since 1st January 2023.
Inflation continues to weigh on consumer confidence, while a large proportion of Japanese households will see further increases in the price of electricity next March, with most suppliers having announced price increases from this month.
The second half of 2022 was marked by a significant and generalised fall in global transportation costs, accompanied by a freeing up of supply chains. Global maritime freight fell back to levels almost five times lower than at the peak in autumn 2021. Only transportation costs for liquefied natural gas (LNG) increased significantly, due to Russian gas shortages, although prices have also fallen back since December.
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.
Confidence amongst Japanese consumers fell sharply this autumn, reflecting the difficulties they are experiencing in the face of inflation rising to its highest level for more than thirty years (3.8% y/y in October). According to the Cabinet Office, consumer confidence has fallen back to its level from the summer of 2020, when the pandemic was in full swing.
Along with the United Kingdom, Japan has had the least vigorous recovery out of all of the G7 countries during the last two years. The country even recorded a 0.3% q/q contraction in real GDP in Q3 2022, pulled down by slowing residential investments and net exports. Even though consumption expenditures grew during Q3 (+0.2% q/q), it is still well below its 2019 levels. The end of Covid-19 restrictions, which were completely lifted in October, will provide additional growth during the last quarter of the year, but the overall increase for 2022 will be rather sluggish (+0.9%). We are expecting a further slowdown in business activity in 2023 (+0.3%), which implies a return to pre-pandemic levels during 2024 at the earliest.
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
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%)
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.
Disruption in global trade has continued to abate. Despite this, there could still be major trade friction this winter, in addition to the direct repercussions of the war in Ukraine. China is facing a record rise in Covid-19 infections, and its Zero-Covid policy has shut down several plants in Henan province, which is home to the production lines for major global technology groups.
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.
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.
Japanese manufacturers are relying more and more on the activities of their overseas-based subsidiaries as sources of opportunities. Sales by manufacturing companies, realised by these subsidiaries, stood at 38.8 trillion JPY (299.7 billion US dollars) in the 2nd quarter of 2022, a record. This represented 28% of the total sales by Japanese manufacturing companies, when we add the sales by subsidiaries abroad to those of companies located in Japan. This percentage is also a new historic high. The main “expatriation” sector by far remains the transport equipment sector (53.6% of the sector’s total sales are realised abroad), an industry that is strongly embedded in global production chains
UK, Greece, South Africa: the strikes in the ports industry have multiplied in recent days, leading to disruptions to activity, in particular in South Africa. However, global maritime traffic continued to decongest and freight, as measured by the Freightos index, fell to its lowest level since the end of December 2020 (Figure 5). This represents a fall of 70% from the peak in September 2021 and a two-thirds drop in costs since the beginning of 2022.
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 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.
Despite the still very severe difficulties in the automotive sector and for gas and electricity suppliers, Japanese industry is holding up. The record level of profits recorded by Japanese manufacturers in the second quarter, as reported in the Ministry of Finance’s quarterly survey, was a first significant factor. In addition, the September Tankan survey was better than expected. The general diffusion index improved by 1 point (3) compared with an expected drop of the same magnitude. Confidence in the non-manufacturing sector was the most positive surprise.
The Yen continued to plunge this summer, reaching its lowest level against the dollar in 24 years. The Bank of Japan (BoJ) is keeping its yield curve control policy unchanged, exacerbating the gap with other major central banks and, consequently, downward pressures on the currency. This depreciation has also led to an unprecedented widening of the trade deficit. Although the pace of inflation is significant for the country (3.0% y/y in August), it remains under control and at a lower level than in 2014 and the start of the Abenomics programme. Even if it’s tightening, there is still room for manoeuvre for the BoJ. However, with a GDP level almost 2.5% below its 2019 summer level, Japan remains the G7 country where the upturn in activity has been the least pronounced since two years.
Spain is unlikely to avoid a difficult winter. Although its economy is structurally less vulnerable to energy shortages, the inflationary shock is severe and is not slowing down, with an inflation rate of over 10% in August. The rise in non-energy prices is amplifying relentlessly. Despite government action, the decline in purchasing power for Spanish households will be among the biggest in the Eurozone. Although tourism is likely to have helped business to cope with the third quarter, we are expecting a contraction in the fourth quarter of 2022, which is likely to continue through the winter. Job creation was strong again this summer, but opinion surveys are also pointing to a downturn on the way.
