For about a decade now, the exploitation of new natural gas reserves in the Eastern Mediterranean has had significant economic consequences for producing countries, and has been upgrading the region’s position on the international gas market. Egypt still dominates the sector, with significant reserves and export infrastructure, but Israeli production is increasingly impacting the region’s exports. 2022 was a very favourable year for the sector due to rising prices and European demand. Despite the current decline in prices on the European market, this trend should continue in the coming years
Egypt is heavily exposed to the consequences of global warming due to its Mediterranean geographical location, high population growth and the importance of the agricultural sector. Already deemed critical, water stress is likely to increase in the medium and long term. The deteriorating trend of various vulnerability and resilience indicators, currently at medium levels, is increasing climate risk in the long term. The financial resources of the Egyptian government are extremely constrained, given the deteriorating macroeconomic situation and the unfavourable outlook. Transformation of the energy mix may be partially funded by private capital. However, funding for climate change reduction and adaptation policies, by definition less profitable in the short term, remains problematic.
After years of financing through international markets and China, Kenya is facing a considerable increase in external debt servicing, which has led to strong pressure on external liquidity and on the shilling. Sustained economic growth in 2021-2022 was not enough to stabilise debt ratios. Renewed in late May 2023, support from multilateral creditors has helped to partially reconstitute official foreign exchange reserves and somewhat reassured investors. But the risk of social instability has increased significantly due to committed fiscal consolidation efforts and persistent high inflation.
The Ivorian economy seems to have weathered well the various external shocks since 2020. Growth has remained robust and inflation relatively under control. However, the measures put in place by the authorities to protect the population and the continuation of major public infrastructure projects have significantly widened the budget deficit, while financing conditions have deteriorated. In order to reduce pressure on public finances and external accounts, the authorities have called on the IMF. They have embarked on a fiscal consolidation programme that could prove difficult to complete.
GDP growth, inflation, interest rates and exchange rates
After inflation, would it be the turn of wages to change gear in Japan? The report published by the Ministry of Health, Labour and Welfare on July 7th shows indeed a notable increase in (scheduled) base wages in May, up 1.0% m/m, the largest monthly increase since the start of current statistics in 1990.
For economists and central bank watchers, the ECB conference in Sintra (Portugal) and the Federal Reserve conference in August in Jackson Hole are the highlights of the summer season. As always, the presentations and panels at the Sintra conference were very stimulating but also sobering. Disinflation is too slow, there are upside risks to inflation compared to the pre-pandemic era, policy rates will have to remain elevated and economic forecasting is more challenging than ever.
In the major OECD economies, the slow pace of disinflation is expected to continue, while the slow slowdown in growth will eventually lead, because of the monetary tightening (particularly rapid and significant), to a recession in the United States and stagnation in eurozone GDP. Various supportive factors should limit the extent of the reversal, but the ensuing recovery would be equally limited. The slow convergence of inflation towards its 2% target would force central banks to maintain a restrictive policy despite the start of rate cuts in the first half of 2024.
The US economy continues to grow and create jobs, albeit at a gradually slower pace, and the Federal Reserve has not quite finished with rate hikes. We continue to anticipate a recession, from Q3 2023 until Q1 2024, under the effect of monetary tightening. Having opted for the status quo in June on the back of inflation continuing to fall and in order to take time to assess the effects of the monetary tightening implemented to date, the Fed is expected to make a final 25 bps increase in July, bringing the Fed funds range to 5.25-5.50%.
China’s economic growth recovered rapidly following the abandonment of the zero-Covid policy, but it is also running out of steam faster than expected. Domestic demand is held back by a significant loss of consumer and investor confidence, and export momentum is stalling. The authorities are cautiously easing monetary policy, and additional stimulus measures are expected in the short term. They should, among other things, aim to encourage youth employment.
Inflation in Japan continues to rise, spreading to all the items in the consumer price index. Inflation expectations remain anchored around the 2% target and price increases should remain at this level in the medium term. We expect the Bank of Japan (BoJ) to raise the 10-year sovereign rate ceiling to 1% in July, before ending its yield curve control policy by the end of 2024. Real GDP grew by 0.7% q/q in Q1 (+2.7% in annualised terms), mainly supported by household consumption and non-residential investment. The return of foreign tourists (+71% q/q in Q1) also enabled activity to rebound after two disappointing quarters. Although slowing, growth should continue in Q2 (+0.5% q/q) and throughout the second half of the year, reaching 1.1% in 2023.
The eurozone entered a technical recession in Q1 2023, with Eurostat having revised lower its estimate of quarterly GDP growth for Q1 from +0.1% to -0.1%, i.e. the same pace of contraction as in Q4 2022. These results do not profoundly change our assessment for 2023: weak or slightly negative economic activity, quarter-on-quarter, although growth for 2023 as a whole should be more positive thanks to the favourable carry-over growth effect. Our current forecasts are based on a terminal refinancing rate of 4.5%, which would be reached at the monetary policy meeting on 14 September. Nevertheless, the scenario of harsher tightening cannot be completely ruled out, given the ongoing inflationary momentum and still high inflation generalisation indices.
Germany experienced a technical recession in Q4 2022 (-0.5% q/q) and in Q1 2023 (-0.3% q/q), driven by a contraction in household consumption (-1.7% then -1.2%). Although the main cause of this recession was not its industrial core, the German economy showed signs of weakness which hindered growth. While disinflation should allow household consumption to recover in Q2, economic surveys however, are pointing to a further deterioration, which once again exposes the German economy to a risk of recession in H2.
After a second half-year 2022 during which growth weakened markedly, Q1 2023 saw a relative rebound, which should be confirmed in Q2: a rebound rather concentrated in some sectors, mainly transport equipment and tourism. However, economic surveys have deteriorated since March, reaching relatively low levels, particularly in manufacturing. Housing, business services and exports are all areas of concern which, taken together, are likely to have a more pronounced negative impact in the second half of 2023, both in terms of growth and job creation, which are continuing for the time being.
Following a mild contraction in the last three months of 2022, Italian GDP rose by 0.6% in Q1 2023. The carry-over for 2023 is +0.9%. In Q1, domestic demand excluding inventories added 0.7 percentage points to growth, while the contribution of both net exports and inventories was negative. Investment rose by almost 1%, reflecting the improvement of economic and financial conditions for Italian firms. Italian households benefited from the strong recovery of nominal income, but still suffered from the purchasing power loss due to inflation. This latter remains among the highest in the euro zone, at 8% y/y in May (harmonised measure).
The drop in inflation in Spain has provided no respite for the coalition in power. The Socialist Party’s losses in the regional and local elections on 28 May to the People’s Party, led Prime Minister Pedro Sanchez to announce a snap general election on 23 July, five months before the originally scheduled date. Despite a still dynamic labour market, the drop in purchasing power and the housing crisis are penalising the party in power, which has fallen even further behind in the polls this spring. The property market is showing signs of a limited correction for the time being, but the continuation of monetary tightening and the resulting hike in lending rates are likely to accentuate this downturn.
At the start of this year, Belgian GDP growth remained at above-average levels. Inflation is currently slowing down alongside the cooling of the labour market. Rising interest rates have started to bite, as real estate spending is already declining, with firm capex to follow suit. A (brief) recession towards the end of the year remains possible but unlikely. Even if it does materialise, a debt-constrained government won’t be of much help, however.
The interest rate projections (‘dots’) of the FOMC members represent a reference point that can help investors and economic agents in general in forming their own interest rate expectations This can be particularly welcome when the monetary environment is changing swiftly like has been the case over the past two years. To explore this, a comparison has been made between the federal funds rate projections of the Survey of Market Participants (SMP) and those of the FOMC members. It seems that the dots may play a role in anchoring long-term interest rate expectations. The private sector forecasts closely follow the dots for 2023 and to a lesser extent for 2024, beyond which they are essentially stable. This is important considering that it might influence the pricing of bonds
Uncertainty about US economic policy, based on media coverage, fell in June after a rebound in May. The European Commission’s economic uncertainty index fell in June, continuing its decline since October 2022, as uncertainty in the various sectors of activity decreased, except in industry, where the index remained stable.
Which country is the most exposed to recession? Is it the United States or the eurozone? The first answer that comes to mind is: the eurozone. It has, indeed, “technically”, already slipped into a recession in view of the double fall in GDP in Q4 2022 and in Q1 2023. But, for now, this recession looks to be only “technical”: indeed, the contraction in GDP is small and not widespread across all growth components or among eurozone members.
While it might have been hoped that the current drop in inflation would provide a stronger boost to household confidence, this, and consequently consumption, remains constrained. This is due to the impact of rising interest rates on purchasing intentions in both France and Germany.
On 22 June, the Mexican Central Bank maintained its main policy rate at 11.25% for the second time in a row. The Governing Board’s decision was unanimous and largely anticipated. In its press release, the Board stated that the pause should continue over the coming months: the downward trend in inflation seems to be confirmed, but the outlook remains «complex and uncertain».
The significant and fast paced monetary tightening by major central banks and the prospect that more is to come raise the concern of a monetary ‘overkill’. This could happen due to a non-linear reaction of economic agents to an umpteenth rate increase. Several factors can play a role in this respect: negative animal spirits, debt levels and their characteristics, asset valuations, bank lending, capital markets. This calls for increased gradualism and, at some point, taking a pause whilst insisting that this doesn’t represent an end to the tightening cycle.
