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The dynamism of French exports has noticeably slowed over the past few months. Although exports over the first 9 months of the year are EUR 14 billion higher than those recorded over the same period in 2022, most of this gain was achieved in Q1. Over Q2 and Q3, the cumulative increase in exports was limited to EUR 1 billion (compared to Q2 and Q3 2022), with aeronautical exports (+5.5 billion) leading the increase.
Economic surveys in September are sending out mixed signals. Consumer confidence is falling in most countries, which in some cases (France, Spain) underlines a slight rise in inflation. This loss of confidence is also accompanied, in general, by a decline in purchasing intentions for durable goods, which can be linked to high interest rates and an expectation of a moderate downturn on the labour market. Lower consumer demand is affecting companies' order books, with an impact that varies according to sector. In industry, economic surveys are more affected, while in services, activity remains dynamic in the US and Japan, while being more modest in Europe.
German inflation resumed its downward trend, after stabilising between May and August (6.4% y/y in August according to the harmonised index), to reach 4.3% in September, due, firstly, to base effects (seasonally adjusted inflation was 2.3% m/m in September 2022, compared to a more normal 0.3% in September 2023). We expect a further drop in inflation of nearly 1 pp in October for the same reason (+1.1% m/m in September 2022 1 pp above the average for October over the last 15 years). Underlying inflation also fell to 4.8% y/y in September after a high of 6.3% in August 2023
The hierarchy has changed: French inflation, which was well below inflation in the eurozone, is now higher (5.7% in September compared to 4.3% y/y, according to the harmonised index). On average, French inflation even exceeded its June-July level by nearly 0.5 points in August-September (compared to a drop of 0.6 points in the euro zone). This was due to the rebound in energy prices, which was stronger in France, particularly with the increase in the regulated electricity tariff in August 2023 (+10%). Conversely, the drop in underlying inflation continued (3.6% y/y in September compared to 4.3% in July). This is mainly due to stabilisation of the (seasonally adjusted) index for manufactured goods prices between April and September.
The German economy is affected by the transmission of the inflationary shock to household consumption. However, the underperformance of the German economy also reflects more structural difficulties, reminding the “Standort Deutschland[1]” debate. These difficulties began in 2018 shortly before the first European regulations aimed at adapting the automotive sector to climate change were implemented. Manufacturing output has never returned to the November 2017 peak and production capacity in the sector has declined. Against a backdrop that is still difficult, we expect another recession in the second half of 2023.
The French economy is characterised by a dichotomy. Household spending – consumption and investment – has decreased in volume (-1.4% and -6.6% in Q2 compared to Q4 2021), while corporate investment has increased (+6.7% between Q4 2021 and Q2 2023). This factor, combined with the reduction in constraints on the production of transport equipment, has enabled high growth in Q2 (0.5% q/q). While these factors should continue to support economic activity in the medium term, growth may be constrained in the coming quarters by the fall in demand against the background of high household savings.
With +4% in Q3 and +5% in Q2, total business insolvencies over 3 months were, for the second consecutive quarter, higher than their pre-Covid level over the same period, according to preliminary data from Banque de France. Over 12 months, industry, accommodation and catering and real estate are among the sectors with higher insolvencies than before Covid. Overall, the phenomenon is likely to increase with a greater proportion of liquidations than in the past and a higher number of large and medium-sized companies affected by insolvencies.
German exports of goods increased by 2.6% y/y in the first 7 months of 2023 compared with the same period in 2022, but one usual destination is missing: China (-8%).
In August and September, the economic indicators of the main OECD economies point to a downturn. Business climate surveys in the UK and the euro zone - and especially in Germany and France - point to an already marked weakening of the economy. In the United States, this is expected, particularly by households. We predict this will happen from Q4 onwards. Japan is the exception, with the Services PMI remaining high.
While Germany is barely coming out of a recession recorded in Q4 2022 and Q1 2023, economic surveys emphasise the risk that the country will fall back into recession in H2. The deterioration identified by IFO’s business climate is clear
The first hard data for July were relatively good (manufacturing production up 0.7% m/m) in France. Nevertheless, economic surveys point to a deterioration. Insee's business climate indicator was stable at 100 during the last 5 months (from May to September), while manufacturing confidence was below 100 during the last 2 months
French growth surprised on the upside in Q2 2023. Corporate margins increased and their cash positions remained supportive, allowing them to continue investing despite higher interest rates. Conversely, household consumption and investment contracted, despite gross disposable income and household purchasing power positive evolutions compared to a year ago. Households preferred to save more, with the rise in interest rates encouraging them to reduce their investments and purchases of durable goods: This lower demand should weigh on French growth, which we expect to be at 0.5% in 2024.
In his opening remarks at Jackson Hole on 25 August 2023, Jerome Powell provided a fairly detailed analysis of US inflation, focusing in particular on the three main components of core PCE* inflation to be monitored in order to track the disinflation process. The chart illustrating his comments is reproduced here. Two encouraging trends emerge – the sharp fall in core goods inflation and the beginning of the decline in housing services inflation – but also, and above all, a third concerning trend: the absence of a fall in non-housing services inflation
Q2 saw a marked reduction in job creation. This drop may seem natural in a labour market which quickly overcame the shock from Covid-19 and in the context of more moderate GDP growth (apart from a few exceptions, such as in Q2 2023). However, it reflects the deterioration in certain sector-based dynamics (including construction), although more favourable developments are observed in other sectors, industry in particular.
August 2023 marks an upturn in inflation in France, which contrasts with the disinflation observed in previous months. Energy is the main cause of this rebound, linked to the rise in regulated electricity tariffs and the increase in fuel prices. In the medium term, the prospect of a positive energy inflation should delay the drop in inflation below the 2% threshold.
In July, there was still divergence between the main OECD economies. Economic surveys showed signs of a more marked slowdown in Europe than in the United States, where various indicators (non-manufacturing ISM, household surveys) even improved.
Economic surveys pointed once again to a downturn, including the ifo Business Climate Index (88.5 in June compared to 93.4 in April) and the ZEW Indicator of Economic Sentiment (-14.7 in July compared to 28.1 in February). The erratic momentum of factory orders, which were up 6.4% m/m in May (after a low point in April 2023 not seen since May 2013), underlines one of the constraints at work: the irregularity of activity in transport equipment, which remains subject to sporadic supply difficulties. This phenomenon is generating high volatility in production, both in the aeronautics sector and the automotive sector (lower in April with an upturn in May, as also seen in France).
The downturn in economic surveys highlights a drop in demand (contraction of balance of opinion on global and export order books), particularly in the manufacturing sector. The sectors most sensitive to the economic cycle (chemicals, plastics, metals, packaging, wholesale trade and transport services) are all experiencing a marked drop in their synthetic confidence index. In the construction sector, the balance of opinion on the activity in new housing fell again to -22.5 in July (-10.7 in April). By contrast, leisure-related services, information-communication, transport equipment and part of the construction sector (new building excluding housing, maintenance-renovation) are still growing.
Although in May, the business climate might well have suggested a future recession, in June, things looked less clear. Admittedly, the further drop in the manufacturing ISM, to 46 in June, brought it to its lowest level since the 2008 crisis (excluding the Covid period). However, the message conveyed by the non-manufacturing ISM was noticeably different, with a rebound to 53.9 in June, compared to 50.3 in May.
Germany experienced a technical recession in Q4 2022 (-0.5% q/q) and in Q1 2023 (-0.3% q/q), driven by a contraction in household consumption (-1.7% then -1.2%). Although the main cause of this recession was not its industrial core, the German economy showed signs of weakness which hindered growth. While disinflation should allow household consumption to recover in Q2, economic surveys however, are pointing to a further deterioration, which once again exposes the German economy to a risk of recession in H2.
After a second half-year 2022 during which growth weakened markedly, Q1 2023 saw a relative rebound, which should be confirmed in Q2: a rebound rather concentrated in some sectors, mainly transport equipment and tourism. However, economic surveys have deteriorated since March, reaching relatively low levels, particularly in manufacturing. Housing, business services and exports are all areas of concern which, taken together, are likely to have a more pronounced negative impact in the second half of 2023, both in terms of growth and job creation, which are continuing for the time being.
GDP in the United Kingdom rose by 0.1% q/q in Q1 2023. The winter recession heralded in autumn 2022 did not materialise thanks to public investment, the momentum of services and the resilience of industry. This resilience is good news, but is likely to make inflation more persistent in the medium term, while the latest figures once again surprised on the upside. The Bank of England (BoE) will have to continue to raise interest rates. This will impact growth, which is likely to be zero in 2024, after already reaching just 0.4% in 2023.
While it might have been hoped that the current drop in inflation would provide a stronger boost to household confidence, this, and consequently consumption, remains constrained. This is due to the impact of rising interest rates on purchasing intentions in both France and Germany.
In June, the main OECD economies experienced divergent trends, raising the question of the tipping point between a situation where growth continues – with inflationary pressures requiring further monetary tightening – and another where it slows down further and where the fall in inflation means that an end to rate hikes can be envisaged.
Business climate indicators in Germany have deteriorated in recent months, including the IFO survey (91.7 in May, 5 points below its long-term average, compared to 93.4 in April) or the ZEW index. The latter recovered slightly in June (-8.5 compared to -10.7 in May) but remained very negative and continued to deteriorate in most industrial sectors, as a result of a fall in demand (the current situation index fell at the same time from -34.8 to -56.5 between May and June).
