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.
Initially estimated at +0.1% q/q, growth in the eurozone in Q1 2023 is now slightly negative, at -0.1% (after a similar drop in Q4 2022). This downward revision was driven by that of German growth. The succession of two quarters of decline in GDP defines a “technical” recession, which it is at this stage: the contraction in GDP is small and it is not broad-based to all growth components neither to all the Member States.
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).
French economic indicators point to a slowdown in growth. INSEE’s business climate in the manufacturing industry has deteriorated. It stands at 101 in June, below its average level during the Q1 (104) and was in May (99) below its long-term average (100) as well as wholesale trade (94) and non-automotive retail trade (94). In particular, the balance of opinion on order books in the manufacturing sector was in June (-17) below its levels observed in December (-15) and March (-13).
The Italian economy surprised positively in the first quarter of 2023, with real GDP growing by 0.6% q/q. However, we expect this good performance to be followed by a slowdown in the second quarter and then a one-off contraction in the third quarter.
Despite the support of tourism, which has been at levels close to those of 2019 since the beginning of the year, the effects of the rise in interest rates and the drop in household purchasing power on the Spanish economy should worsen over the course of the year.
According to the Federal Reserve Bank of Atlanta's GDPNow estimate, US growth stands at +0.5% q/q in Q2 2023, a figure slightly higher than our forecast (+0.4% q/q) and slightly better than Q1 (+0.3% q/q). As Q1 growth was largely driven downwards by the negative contribution of inventories (-0.5 pp), we can expect a more favourable development in Q2. Although a further decline in residential investment is hardly in doubt (it would be the 9th in a row), the resistance of household consumption and non residential investment will be closely scrutinised.
British economic activity recovered by 0.2% m/m in April. This recovery follows a 0.3% m/m contraction in March. This should be put into perspective since monthly GDP remains 0.1% below the level reached in January and February. The services sector returned to growth (+0.3% m/m) after two months of contraction.
Real GDP growth rose in the last two quarters in Japan, but is still slightly below 2019 levels. However, a slowdown in activity is expected from Q2 and until the end of 2023.
China’s post-Covid economic rebound is running out of steam with surprising speed. Indicators for May 2023 show a slowdown in all demand components.
GDP growth, inflation, interest rates and exchange rates
The German economy experienced a recession during Q4 2022 and Q1 2023. Even though consumer spending has significantly contributed to this downturn, growth has been underperforming in Germany for over five years, largely driven by the underperformance of its manufacturing sector. Industry has been facing stronger constraints than elsewhere in Europe, and its size has decreased, which is a relatively new phenomenon in recent times in Germany. The country is still going through this tough patch for industry, which could cause German growth to fall again during the second half of the year.
It is generally assumed that Brexit has made the United Kingdom less attractive economically. However, data on the balance of payments and foreign workers reveal that it’s not as simple as that.Granted, as recently as March 2023, one UK company out of four ranked Brexit as one of its top three concerns. While that number had fallen since 2019, it does show that concerns have not disappeared entirely.Real business investment (both foreign and domestic) in the UK was 0.4% lower in the fourth quarter of 2022 than in the second quarter 2016. However, this decline was not driven by weaker foreign direct investment (FDI) by non-residents in the UK, as this does not show up in the data.Brexit has had a more notable impact on workforce flows
The analysis of the cyclical environment tends to focus on the change in the level of economic variables (growth, inflation), rather than on the level (activity, prices) itself. However, both matter. The recent decline in energy price inflation is good news but the price level remains well above that recorded at the start of last year. In the manufacturing and construction sectors, the assured production based on the level of order books remains very high. This might explain what hiring plans remain elevated. However, the order intake has been slowing. Historically, such a development has been followed by a reduction in the length of the assured production
The global composite PMI rose to its highest level in a year and a half in May at 54.4 compared with 54.2 in April, the fourth increase in a row. However, this improvement in global activity conceals a clear disparity between the brisk momentum of the services sector and the weakness of the manufacturing sector.
Dutch GDP contracted by 0.7% q/q in Q1 2023, after +0.4% q/q in Q4 2022 (revised by 0.2 percentage points to the downside). There are several drivers to this contraction observed in Q1.
The European Commission’s economic uncertainty index fell in May, continuing the decline since October 2022, due to the reduction in uncertainty in various business sectors, apart from construction, which saw a marked rise.
Rates and exchange rates - GDP Growth and inflation
Non-financial companies’ profit margins increased in the first quarter of 2023 to reach 32.3%, up from 31.9% in the fourth quarter of 2022. French companies continue to benefit from increased pricing power to settle their sale prices.
There were slight signs of recovery in real estate and construction activity following the lifting of health restrictions in December 2022 and thanks to support measures taken by the authorities. However, hopes for sustainable improvement in the property sector soon fell.
Based on the PMI data and the European Commission business surveys, it seems that in the Eurozone, industry is clearly slowing down, demand is softening and labour market bottlenecks have eased somewhat. In combination with input prices that are down, this should lead to an easing of output price inflation. In services, the picture is different. Hiring difficulties remain a big constraint on activity, momentum in terms of activity and orders has improved. Input price and output price inflation has eased only slightly. Such a dichotomy complicates the task of the ECB: ongoing strength in services would imply that past rate hikes didn’t yet have a significant impact and would justify more tightening, but this would only make things worse for the industrial sector
The reopening of the Chinese economy at the end of last year has finally had its effects with a few months’ delay. Exports from China jumped 19.8% m/m in March, according to preliminary figures released by the CPB.
In April and May, there was a relative deterioration in the main OECD economies, with some divergences in the magnitude and extent of this deterioration across the economies. In Europe, the deterioration observed in the manufacturing sector over the past few months is beginning to spread to services, where confidence indices have begun a downward trend. In the United States, the ISM non-manufacturing rose moderately in April, compared to an ISM manufacturing index below 50 for the sixth consecutive month.
