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.
A rebound in Japanese activity is expected in the first quarter of 2023, linked to the improvement in business and household confidence surveys. The composite PMI returned above the expansion threshold in January and continued its moderate improvement, reaching 52.9 in March. Household confidence – at its highest for a year – also recovered slightly in March, but it is still very low.
The INSEE business climate indicator saw a moderate downturn in April. This suggests that the upturn seen at the beginning of the year will not last.
GDP growth, inflation, interest rates and change
In Western Europe, in Q4 2022, the number of business insolvencies returned to levels close to those seen at the end of 2019. This increase conceals national disparities. The United Kingdom and Sweden saw it earlier, as weakening growth and tightening of monetary policy occurred earlier in these countries (and more significantly for the United Kingdom) than in the eurozone. In the eurozone, the increase in insolvencies remains partial, but is likely to continue.The situation in the various sectors reflects these differences. As a result, the increase is almost across all sectors in the United Kingdom and Sweden, particularly in construction and even more so in trade.In France, business insolvencies are approaching their pre-Covid levels but are still 6.1% lower in Q1 2023
The scenario of a slowdown in the emerging economies in 2023 is based on two hypotheses: 1) a slowdown in global trade and 2) the recessionary impact of inflation and monetary tightening. The first hypothesis is now a certainty: exports have clearly contracted in recent months, in both the advanced countries and emerging economies. The causes are partially circumstantial, and hopefully the cooling of world trade will only be cyclical. It is possible, however, that the trade and technological decoupling of the US and China are also a contributing factor.
Chinese economic growth has re-accelerated since the end of January, mainly driven by services and household consumption. The recovery in manufacturing activity is more moderate. In the real estate sector, the crisis is lessening. These improvements will continue in the short term. However, constraints on economic growth remain significant; they principally stem from the weakening global demand and geopolitical tensions as well as from financial difficulties for property developers, local governments and their financing vehicles. Beyond this, the question arises of a lasting loss of confidence in the Chinese private sector.
In 2022, economic growth slowed but was still buoyant. The outlook for 2023/2024 is favourable even though real GDP growth should slow by around 1 percentage point. In the short term, the main risks are linked to rising prices, which could force the Central Bank to tighten its monetary policy further. The occurrence of the El Niño phenomenon is also a potentially negative factor. Despite the slowdown in growth and the rise in interest rates (48% of loans are at a variable rate), banks and companies remain much stronger than at the end of 2019. In its latest stress tests, the Central Bank reaffirmed that, despite the deteriorating economic and financial environment, public banks would not need any capital injection to meet capital requirements.
Over the past twelve months, the economic situation in Pakistan has deteriorated dramatically. The government has been facing a balance-of-payments crisis and, as a result, has had to take extensive measures to try to contain the drop in its foreign exchange reserves and fulfil the IMF’s requirements in order to receive the funds needed to avoid defaulting on its external debt.Restrictions on imports, the sharp rise in policy rates, the depreciation of the rupee and the dramatic cut in budget spending have significantly hindered economic growth and triggered a very sharp rise in inflationary pressures. Since February 2023, the external position has improved very slightly. However, it is still very fragile and the default risk remains very high.
Korean economic growth lagged behind in Q4 2022, and the slowdown is expected to continue in 2023. Exports will suffer from slowing global demand, while domestic demand will be penalised by rising interest rates and persistent inflation. The risks of financial instability remain limited, but have increased in recent months. Household debt is high at almost 110% of GDP, and households are very exposed to rising interest rates. In fact, 76% of loans to households are being taken out at a variable rate. Potential credit risks though remain limited to the most vulnerable households.
