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.
GDP growth, inflation, interest rates and exchange rates
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.
Eurozone growth in the first quarter of 2023 was +0.1% q/q according to the data available at the time of writing. This is below our forecast (+0.3% q/q), and therefore rather disappointing, even if it surprises favourably compared to our nowcast estimate (-0.0%). This low growth also puts into perspective the perceived resilience coming from most survey and activity data during the first quarter.
Industrial activity and new industrial orders experienced sizeable variability in Q1, with a strong rebound in January-February followed by a sharp drop in March. Overall, new orders remained stable during the first quarter (q/q). The IFO survey has even deteriorated in May, and the ZEW index has returned to negative territory.
The business climate surveys from the French National Institute of Statistics and Economic Studies (INSEE) deteriorated in April and May, raising fears that the upturn in business activity seen during the first quarter was temporary to a certain extent.
The preliminary estimate of Italian economic growth in the first quarter was a positive surprise, with real GDP rebounding by 0.5% q/q. However, we anticipate a slowdown in activity in Q2, before a contraction in Q3. At 0.9% in 2023, Italian GDP growth would still be above that of the eurozone as a whole.
Spanish growth strengthened slightly in Q1 2023, to +0.5% q/q, according to preliminary figures from INE. However, this acceleration, supported by investment and external demand, did not allow real GDP to cross the pre-Covid threshold. It still showed a small deficit of 0.2% compared to Q4 2019.
In the first quarter of 2023, US growth was +0.3% q/q. This is well below expectations: the figure is half the GDPNow estimate of the Federal Reserve Bank of Atlanta and our forecast (0.6%). Growth appears then not to be so impervious to the inflationary shock and the monetary tightening implemented to cope with it.
The UK economy grew 0.1% q/q during Q1 2023, at the same pace as during Q4 2022. Growth was erratic in the first quarter. Real GDP initially bounced back in January (+0.5% m/m) following a contraction in December (-0.5% m/m), buoyed by the services sector (+0.8% m/m).
Japanese growth picked up again during Q1 2023, posting an increase of +0.4% q/q. However, this upturn needs to be put into perspective, as it follows two disappointing quarters (-0.2% q/q in Q3 2022 and 0.0% q/q in Q4 2022). As a result, Japanese GDP is still at the same level as in Q2 2022.
Continuing the downturn observed in April, INSEE’s business climate indicator fell again in May to 100, the lowest since April 2021. The downturn is widespread and particularly noteworthy regarding the manufacturing sector, where the confidence index even fell to 99, below its long-term average (100) for the first time since March 2021. At the same time, inflationary pressures are continuing to ease.
The French labour market continues to be surprisingly strong with 42,000 net job creations in the first quarter of 2023 according to the INSEE, even though the economy has shown numerous signs of cooling off for more than a year. There is nothing abnormal about the labour market’s resilience, which has still benefited from post-Covid catching-up effects, notably in market services. Yet several driving forces have seized up, especially in construction, and the labour market could begin to deteriorate.
Economic indicators for the month of April 2023 suggest that China’s economic recovery is rapidly running out of steam. Granted, health restrictions were lifted recently (December 2022) and there are still some major post-Covid catching-up effects that are bolstering household demand. However, growth in other demand components has weakened.
In this series of three podcasts "Focus on Labour Productivity in Spain" Hélène Baudchon, Deputy Chief Economist and Head of the OECD team, BNP Paribas Economics Department and Guillaume Derrien, Senior Economist in the OECD team, discuss productivity as an endemic weakness of the Spanish model.This first episode reviews the main trends in the evolution of productivity in Spain compared to its European neighbours over the last 25 years.
