Industrial activity and new industrial orders experienced sizeable variability in Q1, with a strong rebound in January-February followed by a sharp drop in March. Overall, new orders remained stable during the first quarter (q/q). The IFO survey has even deteriorated in May, and the ZEW index has returned to negative territory.
The business climate surveys from the French National Institute of Statistics and Economic Studies (INSEE) deteriorated in April and May, raising fears that the upturn in business activity seen during the first quarter was temporary to a certain extent.
The preliminary estimate of Italian economic growth in the first quarter was a positive surprise, with real GDP rebounding by 0.5% q/q. However, we anticipate a slowdown in activity in Q2, before a contraction in Q3. At 0.9% in 2023, Italian GDP growth would still be above that of the eurozone as a whole.
Spanish growth strengthened slightly in Q1 2023, to +0.5% q/q, according to preliminary figures from INE. However, this acceleration, supported by investment and external demand, did not allow real GDP to cross the pre-Covid threshold. It still showed a small deficit of 0.2% compared to Q4 2019.
In the first quarter of 2023, US growth was +0.3% q/q. This is well below expectations: the figure is half the GDPNow estimate of the Federal Reserve Bank of Atlanta and our forecast (0.6%). Growth appears then not to be so impervious to the inflationary shock and the monetary tightening implemented to cope with it.
The UK economy grew 0.1% q/q during Q1 2023, at the same pace as during Q4 2022. Growth was erratic in the first quarter. Real GDP initially bounced back in January (+0.5% m/m) following a contraction in December (-0.5% m/m), buoyed by the services sector (+0.8% m/m).
Japanese growth picked up again during Q1 2023, posting an increase of +0.4% q/q. However, this upturn needs to be put into perspective, as it follows two disappointing quarters (-0.2% q/q in Q3 2022 and 0.0% q/q in Q4 2022). As a result, Japanese GDP is still at the same level as in Q2 2022.
Continuing the downturn observed in April, INSEE’s business climate indicator fell again in May to 100, the lowest since April 2021. The downturn is widespread and particularly noteworthy regarding the manufacturing sector, where the confidence index even fell to 99, below its long-term average (100) for the first time since March 2021. At the same time, inflationary pressures are continuing to ease.
GDP growth, inflation, interest rates and exchange rates
How much and how quickly inflation will decline in the Eurozone is of key importance for the ECB, households, firms and financial markets. There is concern that disinflation might be slower than expected until now. The latest ECB survey of professional forecasters shows an increase in the number of participants expecting inflation to remain elevated. Inflation persistence can have different sources: a succession of shocks, staggered price adjustment by firms, price and wage increases that try to compensate for the past increase in costs and the loss of purchasing power, evolving inflation expectations. Going forward, the tightness of the labour market, the strength of wage developments and the momentum in service price inflation are key factors to monitor.
April was marked by the stabilisation of the Purchasing Managers Index (PMI) for the manufacturing sector, after a slight decline in March.
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
The current inflationary momentum could encourage the BoJ to reassess its yield curve control policy, or even start a tightening in monetary policy. However, the timing and size of any such adjustments are difficult to predict and may not occur before next year.
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.
The current inflationary situation is unprecedented in many respects. Indeed, some of its strength lies in the ability of firms to pass on the rise in their production costs in their selling prices. This is known as pricing power. And it allows companies to preserve their margins in a difficult environment.
Price stability, financial stability and fiscal sustainability are part of the necessary conditions for the balanced development of an economy in the longer run. They can be considered as pillars on which the ‘economic house’ is built. Weakness or fragility of one pillar -e.g. inflation well above target, overvalued asset prices or a high and rising public debt ratio - may impact the solidity of the other pillars and weaken the overall structure. This gives rise to a debate about the nexus between these three conditions. Given these interactions, it is important that each policy -monetary, fiscal, financial stability oriented- is conducted in a way that takes into account its influence on the other objectives. This should enhance overall economic stability.
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.
