After sustained growth in H1 2023, driven by external demand, the Japanese economy is beginning to slow down. Private demand (household consumption, corporate investment) is offering little support for growth. Although inflation has stabilised at around 3%, it is eroding household purchasing power, which is still not benefitting from significant wage increases. Nevertheless, according to the Ministry of Finance data, corporate profits hit a new record in Q2. Fostering a better redistribution of profits to wages remains a priority for Fumio Kishida’s government, which is preparing a new wave of budgetary measures in October
Eurozone company surveys (PMI, European Commission) continued to deteriorate throughout the summer, although a slight improvement was observed in September for the PMI. The rise in policy rates by 25 basis points in September – the last one according to our forecast – will amplify this phenomenon. We do not expect a recession in the euro zone as a whole in 2023, but moderate growth at 0.5%, mainly due to a favourable carry-over effect in 2022. After a slightly positive first semester, eurozone activity is likely to stall in the second semester. Significant growth differentials are expected between the Member States.
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.
In Q2, real GDP declined by 0.4%, driven by weakening domestic demand. Investment in machinery and equipment fell, reflecting the worsening of firms’ economic and financial conditions. Consumption slightly recovered in real terms. Italian households suffer, however, from both higher consumer prices and increasing interest rates. In Q2, there was a contraction across many sectors. Services value added unexpectedly declined, reflecting the slower recovery of tourism. Inflation is slowly falling: in September it grew +5.7% y/y. Contrary to most predictions, in Q2 2023 house prices increased by 2.0% q/q.
Until this summer, the Spanish economy had proved resilient to the interest rate shock. Private consumption and investment were up respectively, 2.7% y/y and 2.0% in Q2 2023. The positive trend in the labour market and the savings accumulated during the pandemic supported household spending, along with the decline in inflation, which allowed purchasing power to stabilise. However, these supports are falling off. Economic activity will slow in H2 2023 but will not come to a standstill. However, with growth now forecast at 2.2% in 2023 as a whole, Spain will remain one of the drivers of the euro zone this year.
Negative revisions to GDP figures have darkened the mood of the Belgian economy. We expect GDP to remain flat throughout the second half of this year as monetary policy does its job. Short-term volatility in inflation numbers looks likely, resulting in a temporary bout of deflation near year’s end. The labour market remains in good health, suggesting a soft landing is in the cards. Successful government bond emissions could tempt some last-minute pre-election spending by the De Croo-government, but the long-term outlook for public finances remains bleak.
The UK economy shows increasing signs of deterioration. An upturn in unemployment is visible, and the PMI employment data fell sharpy in September. The consequences of monetary tightening are spreading and no sector has been spared; first and foremost, the housing market and even the public sector, recently shaken by the bankruptcy of several councils, including the city council of Birmingham, the country’s second largest city. While inflation in the UK is falling, it remains high compared to its European neighbours, notably due to stronger wage increases. However, the Bank of England is not expected to raise the Bank rate again, even though the vote in September (when a hike was expected) was decided by a single vote
The third quarter 2023 ended with an eighth consecutive decline in the S AND P Global composite PMI. This is an increasingly tangible evidence of a slowdown in the world economy and this negative signal is reinforced by the level of the index now close to the 50-point threshold separating the expansion zone from the contraction zone (50.5 compared to 50.6 in August). While the manufacturing PMI picked up slightly to 49.1 (compared to 49.0 in August), but still indicating a contraction, the services PMI continued to deteriorate for the eighth consecutive month.
PIB growth, inflation, interest and exchange rates
Elevated inflation has forced central banks across the globe to tighten monetary policy aggressively. When we look at the United States and at the Eurozone, we observe nevertheless that many hard data show a high degree of resilience.
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%).
Inflation in the Eurozone is declining and recent survey data point towards a possible stabilisation of economic activity. However, inflation remains well above target and business sentiment has reached a (very) low level. Based on the historical relationship, the current level of the S&P Global composite PMI and the economic sentiment index of the European Commission point towards, at best, a stagnation of activity in the coming months. Whether growth will turn out to be higher or lower will largely depend on how the environment will change. Downside risks are the delayed effect of past monetary tightening and, to a lesser degree, the recent rise in energy prices and the weaker growth environment in China
GDP Growth, inflation, interest and exchange rates.
In the Euro zone, the European Commission economic uncertainty index resumed its decline in August, continuing the trend started in autumn 2022. Uncertainty is declining in almost all sectors, but the construction sector where it has increased again.
GDP growth, inflation, interest and exchange rates.
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.
After proving resilient, the PMI surveys for the services sector are deteriorating more significantly. The indicator lost 3 points in August to 47.9, the lowest level seen since February 2021. In particular, the sub-indices relating to employment and new businesses creation fell significantly.
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
Italy is still facing mixed developments but is likely to take advantage of the ongoing decrease of inflation. The Composite PMI weakened to 48.2 (-0.7pp) in August due to a sharp decline in the Services index, which crossed the contraction threshold for the first time in 2023 (49.8, -1.7pp). The Manufacturing sector reported a fifth consecutive month in contraction, despite a slight upturn
The slowdown in activity in the second half of 2023 should be contained: real GDP growth would only decline, from +0.4% q/q in Q2 2023 to +0.3% q/q in Q3, and +0.2% q/q in Q4. The deterioration in the PMI surveys is continuing in both the manufacturing sector and the services sector.
The United States has observed an improvement in the business climate in August, which should postpone the risk of recession for a few more months. The ISM Manufacturing rose by 1.2 pp and reached 47.6. However, the index has been well in contraction territory since November 2022, the longest period since the GFC.
Growth in Q2 2023 was a positive surprise, with an increase in real GDP of 0.2% q/q, driven by corporate investment, and in particular by spending on transport equipment. Nevertheless, signs of deterioration in activity are multiplying and extending to all sectors.
