In this second episode of the series on labour productivity in Spain, Hélène Baudchon and Guillaume Derrien discuss the main factors that explain Spain's low productivity
This third and final episode of the series dedicated to labour productivity in Spain, discusses key developments capable of restoring productivity in Spain, in particular through the National Recovery Plan (2021-2026) and the España 2050 strategy.
April was marked by the stabilisation of the Purchasing Managers Index (PMI) for the manufacturing sector, after a slight decline in March.
GDP growth, inflation, interest rates and exchange rates
The Bank of England (BoE) delivered another 25bp rate hike on its May meeting on Thursday, raising its interest rate to 4.5%. The forward guidance has not been revised and is still hawkish and it appears from the Monetary Policy Committee (MPC) minutes and report that the end of the tightening cycle might still be coming.
Public deficits in Greece, Portugal and, to a lesser extent, Spain, dropped significantly in 2022. According to Eurostat’s preliminary results – published on 21 April – the primary deficit nearly halved in Spain (-2.4% of GDP), it was erased in Greece, while Portugal once again posted a surplus (1.6% of GDP). In Greece and Portugal, the public deficit fell below the 3% GDP limit set by the Growth and Stability Pact, with which they had already realigned between 2016 and 2019. Although down sharply, the deficit in Spain remains significant, at 4.8% of GDP.Better-than-expected growth in activity and employment and high inflation generated strong tax revenues, which more than offset the rise in spending to cushion the inflationary shock
New factory orders in the industry fell sharply in Germany in March, after a fairly significant increase in February. Overall, these developments are offsetting each other. A very moderate increase over Q1 (0.2% q/q) is consistent with GDP growth, published at 0% q/q for Q1.
Growth in the French economy recovered slightly in Q1 2023, rising to 0.2% q/q following the relative stagnation seen during the second half of 2022. Despite the strengths driving this recovery, the French economy is also exposed to some weaknesses. An analysis across three sectors (transport equipment (including cars), food and housing), gives us an insight into these conflicting forces which imply that while growth is still positive, it can be very different across sectors.
Kenya's external solvency has been deteriorating for several months. After years of indebtedness to international markets and China, external public debt service rose significantly, accounting for 22% of export receipts in 2022. In addition, drought in the country has increased its dependence on imports, and the terms of trade have deteriorated significantly since the start of the war in Ukraine. On top of that are the dynamics of global monetary tightening.
Traditionally, monetary policy focuses on price stability and fiscal policy on other objectives. When inflation is well below (above) target on a sustained basis, this separation of roles implies that monetary policy may need to become extremely accommodative (restrictive). Consequently, interest rates have a large cyclical amplitude, which may have undesirable consequences for the economy and put financial stability at risk. Simulations show that a coordinated approach between monetary and fiscal policy reduces the optimal cumulative amount of rate cuts (hikes). However, putting this into practice would probably be very challenging.
Uncertainty over US economic policy, which is based on media coverage, rebounded in March. The European Commission’s economic uncertainty index declined in April thanks to the easing of uncertainty in the various business sectors.
GDP growth, inflation, interest and exchange rates
The French economy recorded GDP growth of 0.2% q/q in Q1, split between factors of resilience and weakness.
In Q1 2023, Chinese economic growth stood at +2.2% quarter-on-quarter (compared to +0.6% in Q4 2022) and +4.5% year-on-year (compared to +2.9% in Q4 2022). Activity has indeed recovered rapidly since the abandonment of all the health restrictions last December. The real GDP growth rate in year-on-year terms is expected to accelerate further in Q2 2023.
GDP growth, inflation, interest rates and exchange rates.
Industry, services: which sectors will bring the other in its wake? This is the question that arises when one observes the current divergence of the S&P Global PMI indices for the euro area
In March, economic conditions in the major OECD economies remained favourable. While in the US, the growth momentum is continuing, Europe is still benefitting from catch-up effects in the energy-intensive sectors (which had slowed down their production during the winter), and in transport equipment (which is benefitting from reduced supply difficulties). This has favoured employment, whose dynamism has improved (probably temporarily) in Europe compared to Q4 2022.
The release on Friday 28 April of the first estimate of euro area Q1 2023 GDP growth will quantify the resilience reported by most available surveys and activity data for this quarter. We expect moderate positive growth (+0.3% q/q, forecast slightly revised upwards.
Growth in industrial activity observed in January and February suggests more than a technical rebound correcting the downturn seen in December. Some sectors, such as metals, have seen recovery in Q1 2023, compared to a difficult Q4 2022. Conversely, transport equipment showed a growth carryover for Q1 2023 of +6.2%, after an already strong increase in Q4 2022.
Companies benefited from a slight upturn in the business climate during the 1st quarter of 2023, by one point on average, comparing February and March to the average of the previous five months. Signs of recovery were also visible in business data: the upturn in transport equipment manufacturing was accompanied by an improvement in export order books in industry.
According to our current forecasts, the contraction in Italian GDP recorded in the last quarter of 2022 was only temporary and should be followed by a 0.3% q/q rebound in the first quarter of 2023. However, economic growth is expected to slow down over the course of the year.
Our forecasts are for Spanish GDP to grow by 0.3% in the first and second quarters of 2023. In fact, PMI surveys have posted a clear rebound since the beginning of the year. In particular, the composite index reached its best level in almost a year and a half (58.2), led by services (59.4).
According to the Atlanta Federal Reserve's latest GDPNow estimate for Q1 2023, US growth has remained high (2.5% on an annualised quarterly basis). The pace is almost identical to that of Q4 2022 (2.6%), as if growth was impervious to the inflationary shock and the significant monetary tightening.
UK GDP stagnated in February according to the ONS, after a 0.4% increase m/m in January. The drop in activity in services (-0.1% m/m) and industry (-0.2% m/m) was offset by the upturn in the construction sector (+2.4% m/m), which had contracted sharply in January (-1.7% m/m). The economy was therefore resilient.
