The ISM Report on Business showed an improvement in non-manufacturing activity in the United States in November, with the corresponding index rising to 52.7 (+0.9pp). Conversely, the ISM Manufacturing index was stable (46.7), as the improvement in new orders was offset by a deterioration in production and employment. This result is consistent with our forecast of a slowdown in the US economy in Q4, with the GDP growth rate edging down to +0.4% q/q according to our forecast (versus +0.6% for the Atlanta Fed’s GDPNow estimate, and +1.3% in Q3). However, the prospect of a recession is gradually receding, and we now expect a single quarter of contraction in 2024 (-0.3% q/q in Q2, with Q1 expected to be flat).
With the more pronounced disinflation of consumer prices and wages, the Bank of England’s decision to keep the bank rates unchanged at its meeting on 14 December was widely expected. Nevertheless, as in the euro area, the signal for a monetary pivot did not come. In fact, the three members of the MPC in favour of a rate hike in November maintained their position in December.
The revision of Japanese growth figures was unfavourable, resulting in a greater decline in GDP in Q3 than initially estimated (-0.7% q/q versus -0.5% q/q). The downward adjustment is largely due to greater destocking: the negative contribution was increased from -0.3 percentage points (pp) to -0.5 pp. Other significant revisions came from residential investment (from -0.1% q/q to -0.5% q/q), private consumption (0.0% q/q to -0.2% q/q) and public investment (-0.5% q/q to -0.8% q/q). Low household consumption can be explained by the contraction of real wages for the 19th consecutive month in year-on-year terms (-2.3% y/y in October). Overall, private demand reduced quarterly growth by 0.6 pp in Q3.
Almost one year ago, we labeled 2023 as ‘a year of transition to what?’ based on the view that inflation would decline, that official interest rates would reach their peak and a concern that the disinflation process could be bumpy. 2023 has brought us many surprises: the resilience of the labour market in the US and the Eurozone, the extent of monetary tightening, the risk appetite of investors. The biggest surprise was the growth performance of the US economy. Towards the end of the year, the changing message from the Federal Reserve -and to a lesser degree of certain ECB governing council members- with respect to the monetary policy outlook has brought us a another favourable surprise and a hopeful note for 2024.
The latest activity data for the Chinese economy reminds us once again of the fragility of the post-Covid recovery dynamic. Domestic demand is picking up, in particular thanks to the normalisation of private consumption, but significant headwinds remain. Meanwhile, the performance of the export sector seems to have improved slightly.
GDP growth, inflation, exchange and interest rates
In two podcasts Daniel Morris, Chief Market Strategist of BNP Paribas Asset Management discusses with William De Vijlder, Group Chief Economist of BNP Paribas the impact of geopolitical uncertainty on the economy. In this first podcast, they look at economic and geopolitical uncertainty, why it matters and how it can be measured.
In the second podcast on geopolitical uncertainty and its economic consequences, Daniel Morris and William De Vijlder look more closely at the impact of geopolitical uncertainty on firms, households and financial markets.
As the year is drawing to a close, time has come for economists to look back and to assess to what extent 2023 has been in line with expectations or has brought us many surprises. Let's start with the first part, 2023 in line with expectations. Well, the first dimension, the first dynamic, very important is disinflation.Headline inflation has declined very significantly thanks to a base effect, the decline in energy prices, but also core inflation.
According to its final estimate, the S&P Global Composite PMI improved slightly in November, wiping out almost all the decline recorded in October. The November index stood at 50.4 (compared to 50.0 in October and 50.5 in September), ending a five-month decline. This is a slightly positive signal for global growth in the middle of Q4 2023.This modest improvement can be seen in both manufacturing and services.
Updated data on GDP growth, inflation, interest and exchange rates.
Inflation remains high but, judging by the latest figures published for the Eurozone, it is much less so and, at first glance, it is no longer very far from the 2% target. Of course, there is still some way to go; the uncertainty relates in particular to how fast the “last mile” of disinflation will be covered, before reaching the 2% target. It is to be expected to be slow rather than quick, partly because favorable base effects on energy prices will play less.
Business insolvencies continued to rise in October and are now 10% higher than their pre-COVID level (2019 figures) in cumulative terms over the last three months, according to data from Banque de France.
GDP growth, inflation, interest and exchange rates.
German exports of goods fell in October according to Destatis, continuing the trend seen over previous months. As a result, exports have been contributing negatively to German growth for almost a year, most notably exports to China. However, in October, exports to the European Union fell, after being hit by the decline in growth in the region.
Recent business surveys suggest that the cyclical environment in the Eurozone, Germany and France is stabilising but it would be premature to call it a bottoming out. Such a positive development seems unlikely in the near term. Monetary policy is expected to remain tight for some time and part of the effect of the past rate hikes still needs to manifest itself. Bank lending policy is expected to remain cautious because of rising credit risk in a stagnating, high interest rates economy and credit demand from firms and households is weak. Significant progress in terms of disinflation seems to be a necessary condition for a lasting upturn in the economic outlook.
In the United States, economic policy uncertainty, based on media coverage, increased in October for the second month in a row. The rise is probably related to the ongoing risk of a US government shutdown, and also to some uncertainty around the tone of the Fed’s statement after the FOMC meeting of 31 October-1 November.
In China, economic growth is expected to stabilize in the coming quarters, after four years of multiple shocks and unusual volatility. Economic growth rates will stay below their pre-Covid level.
The range of first estimates of Q3 GDP growth is quite broad, ranging from a very positive figure in the United States (1.2% q/q) to a return to stagnation in Europe (-0.1% q/q in the euro area and 0% q/q in the United Kingdom), after a temporary acceleration in Q2. At the same time, Japanese growth posted a clear correction (-0.5% q/q) after two very positive quarters.
Without falling significantly, confidence indicators for the euro area confirm the current phase of stagnation, which is expected to continue into Q4 2023. According to the flash estimate, the composite PMI edged up by 0.6 points to 47.1 in November, while the European Commission's Economic Sentiment Indicator fell slightly in October, down by 0.1 points to 93.3 (its lowest level in three years). Despite the current deceleration in inflation (from 4.3% y/y in September to 2.9% y/y in October in harmonised terms) and an unemployment rate that is close to its lowest ever (6.5% in September), household confidence is not recovering, against a still difficult backdrop in terms of purchasing power
Germany has just experienced four quarters of stagnation or negative growth, and business climate indicators suggest that economic activity remained broadly depressed at the beginning of Q4: current conditions of economic activity remain close to their lowest levels in both the IFO survey and the ZEW survey (-80 for the latter in November). In line with this depressed environment, production in key sectors (automotive, chemicals and metals) declined again in September (in Q3, it is now nearly 15% below the peak reached at the end of 2017 for each of these sectors). Exports do not drive growth as well (-6% y/y in Q3, trade balance figures in terms of value from Destatis).
The French economy is marked by growing signs of cooling, in terms of economic activity, employment and inflation. While growth has so far remained in positive territory, the INSEE business climate, which fell to 97 in November (compared to 100 between July and September), points to a deterioration. According to this survey, the decline in economic activity already present in part of the economy (housing, food trade) has spread to industry, new construction (excluding housing) and the motor vehicles trade.
Economic surveys remain deteriorated. The PMI indices indicate a contraction in activity that is now more widespread, although the downturn is particularly pronounced in the manufacturing sector. The manufacturing PMI fell by 1.9 points to 44.9 in October, while the services PMI dropped more sharply below the 50 mark, after recording a decline of 2.2 points to 47.7. The household consumer confidence index in Italy is decorrelating from inflation expectations– which have been stable since the spring – and is now falling due to the effect of more subdued economic and employment prospects. In fact, the monthly fall in the confidence indicator (-2.4 points) was the steepest in the last fifteen months
The Harmonised Index of Consumer Prices (HICP) rose again to +3.5% y/y in October (+0.21 pp). Food inflation remains high, although it eased from September (+9.5% y/y in October, -1 pp). However, the surge in olive oil prices persisted (+73.5% y/y, +6.5 pp), contributing 0.37 points to overall inflation. As for energy, the deflation is subsiding but remains significant (-10.1% y/y, -3.7 pp). Core inflation meanwhile, eased to +3.8% over a year.
