The end of the year is shaping up to be a difficult one for the eurozone, as displayed by the flash PMI indicators for December. The composite index, fell by 0.6 points to 47, and remains below the threshold of 50 (in contraction territory) for the seventh month in a row. The employment index has not plummeted, but has been gradually declining since April, reaching 49.6 in December, its lowest level in three years. At 6.5% in October, the unemployment rate in the eurozone stabilised at a historically-low level, which is increasingly looking like a floor. We expect the jobless rate to rise slightly over the next few months, in line with current trends in the PMI indices. The unemployment rate for young people (under 25) has already risen by one percentage point in six months, to 14
The business climate indicators highlight a still deteriorated situation, raising fears of another quarter of contraction in activity (-0.1% q/q in Q4 according to our forecasts), following four quarters of stagnation or decline (including -0.1% q/q in Q3). Indeed, the indices linked to current conditions in the IFO and ZEW surveys remained close to historical lows, in both industry and services. Expectations of a small improvement are based on the anticipation of the ECB’s monetary easing in 2024, which remained uncertain for the time being.
The signs of the French economy cooling down intensified in December, with a further fall in the flash composite PMI to 43.7 (44.6 in November). The manufacturing PMI has been below 50 for 11 months and hit a new low in December, as did the services PMI.
Economic growth is slowing down in Italy. After contracting by 0.4% q/q in Q2, economic activity only grew by 0.1% q/q in Q3, almost standing still in that quarter. This small rebound was led by consumer spending (+0.6% q/q, contribution of 0.4 percentage points) and foreign trade (+0.8 points). Nevertheless, these positive developments were counterbalanced by significant destocking. For its part, investment recorded a quarterly change of -0.1% in Q3.
Contrary to the trend observed in the other three major eurozone countries, Spain recorded a more moderate fall in inflation in November. According to the INE, the growth in the Harmonised Index of Consumer Prices (HICP) slowed by 0.2 pp to 3.3% y/y this month (while the decline reached 0.7 points in France and Germany, and 1.1 points in Italy). Based on recent trends in the producer price index, which recorded its eighth consecutive month of deflation in October (-7.8% y/y), this consumer price slowdown is set to continue, and even accelerate, over the coming months.
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.
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.
After several quarters of high job creation (89,000 on average between Q2 2022 and Q1 2023), Q3 confirmed the loss of momentum observed in Q2 (37,000 new jobs after 27,000). Payroll employment in construction and the temporary employment sector are contracting. However, industry continues to create jobs (12,000), as do non-temporary trade services (34,000).
The momentum of private payroll employment has recently slowed in the euro area, as evidenced by job destruction in France and Germany in Q3. This destruction can be partly explained by cyclical sectors, particularly construction. It is a sign that demand constraints are increasingly impacting companies and the labour market.However, labour shortages remain high in the northern countries of the euro area and in Central Europe and, in general, in sectors where demand is not falling (aeronautics and building renovation in particular). Beyond an economic slowdown, which we expect to last until spring 2024, impacting employment, the low level of unemployment and historically high labour shortages should continue to characterise the European economy.
Key figures for the French economy compared with those of the main European countries, analysis of data on the population and the French labour market, activity by sector, publication administration figures, inflation, credit and interest rates, corporate and household accounts.
Both France and Germany shed jobs in Q3 2023 as more and more companies struggled with sluggish demand. Against this backdrop, labour shortages are limiting less production, particularly in Germany, where they were more acute. However, these shortages are persisting, as they are structural, against a backdrop of low unemployment. Output from sectors with the strongest demand (i.e. aeronautics particularly in France) may suffer as a result, as well as development of sectors with the highest labour needs, particularly industries associated with the green transition (electrification and renovation).
In Q3 2023, Chinese economic growth rebounded to +1.3% quarter-on-quarter, after a very poor +0.5% in the previous quarter. It stood at +4.9% year-on-year (y/y) compared to +6.3% in Q2 2023, but this slowdown is due to unfavourable base effects in Q3. Chinese economic growth reached 5.2% year-on-year over the first three quarters of 2023.
Economic surveys in September are sending out mixed signals. Consumer confidence is falling in most countries, which in some cases (France, Spain) underlines a slight rise in inflation. This loss of confidence is also accompanied, in general, by a decline in purchasing intentions for durable goods, which can be linked to high interest rates and an expectation of a moderate downturn on the labour market. Lower consumer demand is affecting companies' order books, with an impact that varies according to sector. In industry, economic surveys are more affected, while in services, activity remains dynamic in the US and Japan, while being more modest in Europe.
Household confidence has dropped slightly since April. This reflects a decline in purchasing intentions for durable goods and a deterioration in the outlook for unemployment. Nevertheless, the Italian labour market remains on track. Unemployment fell to 7.3% in August, its lowest rate in fifteen years. As a result of this drop, recruitment problems are intensifying: the proportion of companies citing labour shortages as a factor limiting production was, in Q2 2023, the largest seen since the early 1990s. Although the working population is far from having closed the gap between the levels seen in 2019 (the deficit was 1.3% in August compared to the peak in April 2019), employment has continued to rise very significantly. This has helped to raise the employment rate (to 61
In September, the European Commission’s economic sentiment indicator fell to its lowest level of the year in Spain. This reflects a slowdown in activity which, according to our forecasts, will result in a slowdown in growth to 0.3% q/q in Q3 and 0.2% q/q in Q4. Inflation is also regaining ground and is again weighing on household confidence, as is the modest deterioration in the unemployment expectations index. It should be noted that the outlook for price developments differs quite significantly depending on the sector, according to the European Commission’s survey: it indicates a new pullback in price pressures in construction (-1.9 pts) and industry (-1.6 pts, the lowest since January 2021), while an upturn is observed in services (+3
The UK labour market has reached a tipping point. For the Bank of England (BoE), in addition to the slowdown in the housing market, this is a further indication of the wider transmission of the rise in interest rates to the real economy. The ONS labour market report for September was postponed until October 24th. Nevertheless, data from the HMRC indicated an 8,360 drop in employees last month; this is the second consecutive monthly fall and a steeper decline than in the previous month (-5,071). Furthermore, the PMI employment indices fell sharply in September, pulled down by services (-3.3 points to 47.9), which slipped below the rate of expansion for the first time since the beginning of the year.
Japanese economic surveys are sending out mixed signals. On the positive side, the business condition index from the Tankan survey improved from 8 in Q2 to 10 in Q3, driven by services: business confidence in the sector was the highest since 1991. The PMI for services is also proving resilient. Although down 0.5 points in September, it remains in expansionary territory at 53.8. Conversely, the manufacturing PMI fell further into the contraction zone for the fourth consecutive month (-1 point to 48.5). As a result, the composite PMI dipped to 52.1 in September. The Economy Watchers Survey dropped from 3.7 points to 49.9 points in September.
In recent decades, Japanese companies have extended significantly their activity abroad. According to the Ministry of Industry data, a quarter (25.8%) of the total turnover of Japanese manufacturers is now coming overseas subsidiaries.
Negative revisions to GDP figures have darkened the mood of the Belgian economy. We expect GDP to remain flat throughout the second half of this year as monetary policy does its job. Short-term volatility in inflation numbers looks likely, resulting in a temporary bout of deflation near year’s end. The labour market remains in good health, suggesting a soft landing is in the cards. Successful government bond emissions could tempt some last-minute pre-election spending by the De Croo-government, but the long-term outlook for public finances remains bleak.
GDP Growth, inflation, interest and exchange rates.
There is broad agreement amongst researchers that population ageing has a detrimental impact on economic growth through a reduction in the working-age population. There is less agreement on the impact on inflation, which amongst other things is influenced by age-dependent spending and savings behaviour. Wage developments will play a key role. A shrinking labour force could create structural labour market bottlenecks in certain sectors, trigger a ‘war for talent’ and force companies to pay higher wages and raise their selling prices. This would spill over to the rest of the economy
Q2 saw a marked reduction in job creation. This drop may seem natural in a labour market which quickly overcame the shock from Covid-19 and in the context of more moderate GDP growth (apart from a few exceptions, such as in Q2 2023). However, it reflects the deterioration in certain sector-based dynamics (including construction), although more favourable developments are observed in other sectors, industry in particular.