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.
Economic data for April and May augur a relatively good Q2 in terms of growth, despite some continuing dichotomies.
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).
The still-elevated level of inflation in annual change and its increasing momentum have continued to adversely affect morale in US households. In April, consumer confidence, as measured by the Conference Board, fell for the third month in a row (97.0, -6.1 pp), ultimately cancelling out the progress seen at the end of 2023. Similarly, the University of Michigan survey reported a drop in its Index of Consumer Sentiment in May, with a score of 69.1 (-10.5), the lowest since November.
The preliminary growth estimate for Q1 has not dispelled doubts about the state of domestic demand in the UK. Although inflation has fallen and real wages and household confidence have improved, British consumers are still cautious. Household consumption rose only by 0.2% q/q in Q1, offsetting a small part of the contraction recorded in the previous two quarters (-1.0% cumulatively). In addition, retail sales surprised on the downside in April, falling by 2.3% m/m in volume, following a slight drop in March (-0.1% m/m). Real GDP rose by 0.6% q/q in Q1, underpinned by positive net exports. However, the underlying dynamic was disappointing, as import volumes fell more sharply than exports.
In line with our expectations, the Japanese economy experienced a 0.5% q/q contraction in GDP in Q1 2024. This contraction was likely linked to the disruptions caused by the earthquake on 1 January on the Noto peninsula and the temporary closure of car manufacturing plants amid a safety scandal. GDP components pointed to a broad weakness in the economy with, primarily, a fourth consecutive contraction in household consumption, which was the main driver of the fall. In addition, the release was accompanied by growth in Q4 2023 being revised down to +0.0% q/q (from +0.1% previously). However, activity is expected to rebound in Q2, with our forecasts pointing to a growth rate of +0.8% q/q.
Faced with a significant increase in official interest rates, companies have been surprisingly resilient. Can this last in an economy which is bound to slow given the ‘high policy rates for longer’ environment? The Federal Reserve’s latest Financial Stability Report gives some comfort based on a comparison of corporate bond yields and spreads to their historical distribution. Moreover, resilient earnings imply a robust debt-servicing capacity. Does this assessment hold in a stress test scenario? A recent analysis of the Federal Reserve concludes that the debt-servicing capacity of the U.S. public corporate sector as a whole is robust to sustained elevated interest rates, unless in case of a severe economic downturn
China’s economic growth continues to be typified by divergence between sectors and sluggish domestic private demand. As shown in our chart below, the manufacturing sector gained in strength between February and April 2024, compared to the previous three months, whilst the service sector saw no improvement.
GDP growth, inflation, interest and exchange rates.
In the first quarter, economic growth in Central European countries improved as expected (Poland: +0.4% q/q in Q1 2024; Hungary: +0.8% q/q; Czech Republic: +0.5% q/q; Slovakia: +0.7% q/q; Romania: +0.5%). Although details of the accounts are not yet available, there is strong evidence that growth was primarily driven by consumption, as reflected by the boost in retail sales.
In the US, in an environment of aggressive monetary tightening, the resilience of companies has contributed to the resilience of the economy in general through various channels -staffing levels, investments, growth of profits and dividends, etc.-. Companies’ resilience has been underpinned by different financial factors: company profitability, cash levels accumulated during the Covid-19 pandemic, the ease of capital markets-based funding, low long-term rates that had been locked in during the pandemic. Finally, the growing role of intangible investments also plays a role because they are less sensitive to interest rates, thereby weakening monetary transmission.
In the United States, economic policy uncertainty based on media coverage increased in April for the second time in a row. There appears to be a correlation between this result and the spillover from the disappointing inflation data in the first quarter, which caused various players (central banks and markets) to postpone and drastically reduce their rate cut expectations for the year. In addition, according to the Chair of the Fed, inflation remains high and the restrictive policy will need to be kept in place even longer in order to keep progressing towards the 2% target.
GDP growth, inflation, exchange and interest rates.
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.
In the US, household deleveraging, fixed rate mortgages, rising financial income on the back of higher interest rates and dividends, in combination with an increase in net worth have contributed to the resilience of households in an environment of aggressive monetary tightening. Nevertheless, some caution is warranted. Aggregate data, by construction, do not shed light on the heterogeneity of households. The financially fragile categories will need to be monitored closely in an environment of high rates for longer, in view of possible spillover effects to the broader economy should their situation worsen significantly.
In April, the S&P Global composite PMI index for worldwide business activity rose again slightly (+0.1 points) reaching its highest level since July 2023 (52.4). This rise results from the increase in services, with the associated PMI hitting its highest level since July 2023 (52.7, compared to 52.4 in March). Conversely, the manufacturing index fell slightly in April (50.3, -0.3pp), following three months of growth. However, it is still in expansionary territory.
GDP growth, inflation, exchange and interest rates
In the first quarter, real GDP growth in the United States and the Eurozone was almost on a par, at a quarterly rate of 0.4% for the United States and 0.3% for the Eurozone, according to initial estimates. However, on a year-on-year basis, the situation remains very much to the United States’ advantage, with growth of 3% when Eurozone growth is only 0.4%.
In line with previous months, the recovery in the private sector credit impulse continued in the first quarter of 2024, after the dip seen in the third quarter of 2023. This said, the recovery was slightly slower than at the end of 2023 and the overall trend is still negative. Developments in lending to business are traditionally more volatile over the cycle than those in lending to households. Recent ones have not deviated from this rule: in the autumn of 2023, at a time when the effects of the tightening of monetary policy were at their strongest, the impulse of lending to households did not fall as far, in absolute terms, as that for lending to businesses. Conversely, its recovery since then has been less vigorous
Since China's accession to the World Trade Organisation (WTO) in December 2001, the European Union's bilateral deficit with the country has widened from EUR 39 billion to EUR 292 billion in 2023 (Eurostat data). This is by far the largest deterioration recorded by the Old Continent with a trading partner, even though, as a whole, the EU's trade balance with the rest of the world returned to surplus in 2023.
