Against all odds, German GDP grew by 0.3% in the 3rd quarter (q/q). This is very surprising because the Minister for the Economy, Robert Habeck, announced on 12 October that “the German economy should contract in the third and fourth quarters of this year as well as in the first quarter of 2023”. Although the detail of the GDP components is not yet available, the national institute of statistics (Destatis) points out that private consumption would have driven growth in the 3rd quarter.
The French economy saw GDP rise by 0.2% q/q in the 3rd quarter, a performance which indicates a high level of activity, following on from the previous positive growth figure in the 2nd quarter (+0.5%). After tourism and catering/accommodation in the 2nd quarter, the positive surprises in the 3rd quarter were corporate investment and manufacturing production. While the automotive sector is one of the sectors that is suffering most from supply problems, which implies a mismatch between production lower than before Covid compared with a strong order book, some of the lag was caught up in the summer, resulting in an increase in manufacturing production (+0.6% q/q), which contributed to significant growth in corporate investment (+2.3% q/q).
Inflation in Spain fell in October for the third consecutive month, from 10.7% in July to 7.3% in year-on-year terms. Although the detailed figures for October will not be available until 15 November, it is likely that, once again, the main driver behind this fall was energy prices, whose pace of increase has slowed noticeably this summer, although remaining high (22.4% y/y in September). The “Iberian exception”, which has been in place since the spring, and the capping of regulated prices on the energy market are paying off. The Spanish government has decided to extend these measures, along with the social bonus which allows electricity bills to be reduced by up to 80% for the least well-off households, until the end of 2023.
The global manufacturing PMI was down again in October, with significant drops in the United States, the euro area, Austria, Germany, Greece, Italy, Spain, Switzerland and the United Kingdom. China saw an improvement but the index stayed below 50. The steep downtrend of new orders continued in the euro area and its member countries, with the exception of France, where the decline in October was more limited after the big drop the previous month. Orders were also down strongly in the US -where the rebound in September clearly did not last- as well as in the UK. China recorded some improvement. India continues to benefit from strong order inflow.
Japanese manufacturers are relying more and more on the activities of their overseas-based subsidiaries as sources of opportunities. Sales by manufacturing companies, realised by these subsidiaries, stood at 38.8 trillion JPY (299.7 billion US dollars) in the 2nd quarter of 2022, a record. This represented 28% of the total sales by Japanese manufacturing companies, when we add the sales by subsidiaries abroad to those of companies located in Japan. This percentage is also a new historic high. The main “expatriation” sector by far remains the transport equipment sector (53.6% of the sector’s total sales are realised abroad), an industry that is strongly embedded in global production chains
Our different uncertainty gauges are complementary, in terms of scope and methodology. Starting top left and continuing clockwise, US economic policy uncertainty based on media coverage has been on a rising trend over the past twelve months. This is related to the policy tightening by the Federal Reserve and concern about its consequences in terms of growth. In the US, the latest data show an increase of business uncertainty about sales revenue growth.
In the third quarter of 2022, Chinese economic activity apparently regained ground that was lost during the very strict lockdowns that were imposed in the spring (in Shanghai in particular), and which were gradually lifted from the end of May. Real GDP grew by 3.9% quarter-on-quarter (q/q) in Q3 after a contraction of -2.7% q/q in Q2. Over the first nine months of the year, economic growth stood at 3% year-on-year (y/y).
Though the manufacturing PMI is a good indicator for assessing the dynamics of industrial production over a long period, recent constraints on supply have again highlighted a methodological problem in the index linked to the way it takes delivery times into account. The way delivery time are handled by the manufacturing PMI must be differentiated according to type of shock, so that the index can better reflect industrial activity. We propose a method that will detect the presence of a positive demand shock or a negative supply shock. The manufacturing PMI is then rectified according to the shock. It is also possible to recalculate the manufacturing PMI by a principal components analysis (PCA), based on all questions available in the S&P Global survey
When growth is slowing, risks tend to be tilted to the downside because households and companies adopt a more cautious attitude in their spending and investment decisions. At the present juncture, it is also difficult to see what could create an upside surprise. To the contrary, according to the IMF, there are several downside risks: the cost of energy, the problems in Chinese real estate, persistent disruptions in the labour market. Financial conditions could deteriorate. Already today they create a discomforting environment, with the risk of a non-linear impact on growth. It illustrates the challenge of central banks with growth-at-risk being at the low end of historical ranges and inflation at the other extreme.
Due to the recent significant increase in interest rates, Eurozone countries now have a borrowing cost on newly issued debt that, for an equivalent maturity, is higher than that of the existing debt. From a debt sustainability perspective, this necessitates a smaller primary deficit or a larger surplus, depending on whether the average interest cost is, respectively, lower or higher than the long-term nominal GDP growth rate. However, this effect will only be fully operational when the entire debt has been refinanced at the higher interest rate. Given the long average maturity of existing debt, the annual adjustment effort is small for the time being but it will grow over time. However, debt sustainability is about more than keeping the debt ratio stable under certain circumstances
The global manufacturing PMI has continued its decline in September. There was a small improvement in Canada and the US but the euro area recorded a further decline, with data dropping in France, Germany and the Netherlands. The index was also down in China whereas India, Indonesia and Vietnam are holding up well. The situation deteriorated significantly in terms of new orders. It is particularly bad in the euro area and the UK although the negative environment is now very broad-based across countries. Orders were down in Japan and China as well, whereas Indonesia saw an improvement. Despite the low readings for the overall index and in particular the new orders component, the employment survey continues to show some resilience.
Despite the still very severe difficulties in the automotive sector and for gas and electricity suppliers, Japanese industry is holding up. The record level of profits recorded by Japanese manufacturers in the second quarter, as reported in the Ministry of Finance’s quarterly survey, was a first significant factor. In addition, the September Tankan survey was better than expected. The general diffusion index improved by 1 point (3) compared with an expected drop of the same magnitude. Confidence in the non-manufacturing sector was the most positive surprise.
In France, inflation fell to 5.6% year-on-year in September after reaching a high of 6.1% in July, but its decomposition has changed. Food prices (with a year-on-year increase of 9.9% in September) became the main contribution to inflation for the first time (representing a third of the 5.6% figure observed in September), exceeding that of the energy component, the reduction of which owes much to the discount applied to the litre of fuel (which grew from 18 to 30 cents). In 2023, the increase in regulated gas and electricity tariffs will be capped at 15% instead of 120%, which will prevent 5 inflation points (overall), according to our estimates.
Excluding China, activity in emerging countries was stagnant in Q2 2022 and business and household confidence surveys indicate that the economic slowdown will continue. Inflation continues to rise and is being accompanied by new decisions of monetary tightening, including by central banks in Asia. The deterioration in external demand and tighter domestic financial conditions have combined with the monetary tightening in the United States and USD appreciation to trigger the slowdown in activity. This is a double whammy for emerging countries. But developing countries, which are also facing the food crisis and a situation of over-indebtedness, are in a more worrisome situation.
Although it remains dynamic, economic growth slowed in the first quarter of the current fiscal year. Monetary policy tightening, a very mixed monsoon season and disruption to global value chains are expected to weigh on activity during the next two quarters. The central bank has revised its economic growth forecasts downwards for the current fiscal year as a whole. At the same time, pressures on external accounts and the rupee are set to remain strong. Despite this rather unfavourable environment, enterprises and banks are holding up well.
During the first six months of 2022, the economy proved to be quite resilient to the consequences of the conflict in Ukraine and China’s zero-Covid policy. In particular, it benefited from the higher prices of exported commodities (mainly coal and palm oil). Its public finances and external accounts consolidated despite rising subsidies and net capital outflows. However, the situation could deteriorate in the fourth quarter and the medium-term outlook is less favourable. Although the fiscal deficit and government debt remain modest, refinancing risks will increase in 2023 in conjunction with the end of purchases by the central bank of government’s bonds, which have been in place since 2020. Moreover, pressures on the rupiah will intensify with the fall in commodity prices.
The recovery is continuing in Thailand. The rebound in private consumption and the gradual return of tourists should help, at least in the short term, to compensate for the slowdown in exports. However, the risks to growth remain on the downside, due to rising inflation, monetary tightening, the weakness in global demand and the absence of Chinese tourists. In the run-up to the elections in May 2023 political tensions could increase again. However, medium-term strategic investments, including the Eastern Economic Corridor programme, should not be jeopardised.
The economic slowdown is likely to continue in the coming quarters. Poland is facing several challenges. Firstly, the country is highly dependent on coal imports, and the price of this commodity has soared since the end of 2021. The Central Bank has moved towards a less restrictive monetary policy despite high inflationary pressures. Finally, the moratorium on mortgage repayments in 2022 and 2023 will have a negative impact on banks’ balance sheets in the short term. However, the Polish economy does have numerous strengths and should show resilience.
All growth drivers weakened in the second quarter of 2022. With a high exposure to Russia for its oil and gas supplies, Slovakia could be amongst the most affected Central European countries by the consequences of the war in Ukraine. The steep rise in energy costs, as well as supply disruptions, will have an adverse impact on industrial activity, which has not yet returned to its pre-Covid level. Moreover, inflation has increased rapidly but is still more moderate compared to other countries in the region. Finally, public and external accounts will deteriorate in the short term, but this situation remains manageable.
Accelerating growth, slowing inflation, falling unemployment and the interruption of monetary tightening differentiate Brazil from most of the world’s major economies. These developments, which are largely attributable to fiscal stimuli (higher social transfers, reduction in taxes and fuel prices), are complicating the task of monetary authorities by partially diluting the restrictive effects of their policy. In the second half of the year, the maintenance of fiscal stimulus should again help limit the slowdown in activity. Brazil’s solid economic performance has allowed financial assets to hold up well despite the general elections and a deteriorating global environment.
The economic dynamism seen in the first half of 2022 is waning. The rebound in private consumption is being held back by rising inflationary pressures, while exports are weakening due to slowing growth in the United States and global demand. Structural weaknesses in the economy (low investment, lack of infrastructure) are also limiting the growth recovery. Moreover, a deterioration in public finances is increasingly likely in the medium term. The very limited rise in fiscal income will not be enough to compensate for the necessary increase in government spending that is expected in the coming years. In addition, sovereign wealth funds have been used over the past two years and the government no longer has any reserves.
Egyptian external accounts have been under pressure since the beginning of the year and the outlook is uncertain. Although the current account was able to withstand external shocks thanks to the rise in gas revenues, only the massive support of the Gulf countries enabled Egypt to cope with portfolio investment outflows and to avoid a foreign exchange crisis. The dynamic remains negative in the short term, given the drop in net foreign currency assets in the banking system and persistent exchange rate pressures, despite depreciation of more than 20% since the beginning of the year
The Qatari economy, which is poorly diversified and based on long-term gas export contracts, has not experienced the same volatility as elsewhere in the Gulf during the last five years. In the short term, high oil prices and the forthcoming World Cup will support growth and enable a return to substantial external and budgetary surpluses. Likewise, the reduction in banks’ external liabilities should continue. Inflation will remain relatively moderate thanks to government intervention and the impact of the stronger dollar on import prices. In the medium term, the macroeconomic outlook is very positive as a result of the significant increase in gas revenues. However, it is less certain in the longer term, in the context of the energy transition
Two years after the shock of the pandemic, Tunisia is now being hit hard by the consequences of the conflict in Ukraine. The rise in commodity prices is leading to a dangerous deterioration in external accounts and public finances. Inflation is at historically high levels, weighing further on economic activity, which has already been struggling to recover since the 2020 crisis. In the absence of any financial room for manoeuvre, Tunisia is hoping to obtain support from the IMF to ease macroeconomic tensions. There are pressing needs.
In 2020-2021, thanks to its diversified economy, Kenya was relatively more resilient to the shock of the pandemic than other sub-Saharan African economies. But in 2022-2023, the recovery will be constrained by the indirect effects of the war in Ukraine and subject to significant downside risks. The country faces a deterioration in its terms of trade. Accelerating inflation will weigh on domestic demand, with the risk of fuelling social instability. This could complicate fiscal consolidation efforts, which are necessary to maintain the support of multilateral creditors, particularly the IMF. The new president has ruled out the option of preventive debt restructuring. But the government’s external liquidity and solvency remain fragile.
