Q1 got off to a bad start, with a drop in manufacturing production in January (-1.6% m/m) linked to the shutdown of oil refineries for maintenance (with new difficulties in March), and a downturn in the automotive sector (supply problems, followed by a drop in demand affecting the production). At the same time, January’s foreign trade data do not suggest a rebound in imports of intermediate goods (inputs for other sectors).
Activity in the private sector in Italy continued to improve in February, according to the composite PMI index, which was up 0.4 points over a month, taking it to 51.1. However, unlike the current situation in Spain, the divergence between the manufacturing sector and the services sector is becoming more pronounced.
As expected, Spanish inflation slowed in February. In year-on-year terms, the Harmonised Index of Consumer Prices (HICP) rose by only 2.9% (-0.6 percentage points compared to January) due to an increase in energy price deflation, itself brought about by favourable weather conditions.1 Like other countries in the eurozone, inflation in services persists in Spain, the country remaining the main component contributing to overall inflation (contribution of 1.9 pp).
US economic activity slowed slightly in February, according to the ISM survey. It reported a deterioration in the business climate in the manufacturing sector, putting a halt to three months of increases, with the associated index standing at 47.8 (-1.3pp).
The UK economy remains deteriorated, but the latest activity figures show a slight improvement at the beginning of 2024. The monthly ONS estimate indicates growth in added value of 0.2% m/m in January, buoyed by a rebound in retail and wholesale (+1.8% m/m) and construction (+1.1% m/m). Nevertheless, this follows a difficult second half of 2023, marked by a 0.5% drop in real GDP.
March saw an improvement in activity in Japan, according to the Jibun Bank PMI survey. Both the manufacturing index (48.2, +1.0pp), thanks to a widespread rise in the main sub-components, and the non-manufacturing index (54.9, +1.3pp) recovered, allowing the Composite index to reach its highest level since August 2023 (52.3, +1.7pp).
According to our forecast, inflation is expected to have fallen again in March to 2.4% y/y compared to 3% in February, due to the marked easing in food prices. However, French inflation is expected to then remain between 2 and 2.5% y/y until the end of August, due to depletion of the favourable effects linked to the end of inflation on food and manufactured goods and the continuation of inflation on services, before probably falling below 2% in September.
When questions have been answered, new ones pop up, reflecting a shift in focus. We are again experiencing this phenomenon. Recent comments by Christine Lagarde and Jerome Powell have provided implicit guidance on the timing of the first rate cut. The focus is now shifting to how fast and how far policy rates will be reduced
GDP growth, inflation, exchange and interest rates.
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.
In the US, the latest Survey of Professional Forecasters (SPF) of the Federal Reserve Bank of Philadelphia paints a rather upbeat picture of the economic outlook. A similar survey of the ECB points towards a gradual pickup in growth this year. In both cases, the level of disagreement is low. This provides reasons to be hopeful about the economic outlook. However, the alternative scenarios are predominantly negative for growth and inflation, and some have totally different implications for the evolution of bond yields. This would mean that as time goes by and the likelihood of the different alternative scenarios evolves, bond yield volatility could be high.
GDP growth, inflation, interest and exchange rates.
The economic situation in January and February highlights the uncertainties surrounding 2024 with, on the positive side, improvements in the business climate in several countries and resilient labour markets (Europe) or labour markets remaining dynamic (US). Combined with a disinflation trajectory not yet spreading to all sectors (services in particular), all these factors are tending to defer expectations of rate cuts.
With zero growth in the last quarter of 2023, the Eurozone has narrowly escaped recession, but economic activity is still hanging by a thread. Over 2023 as a whole, the increase in real GDP just reached 0.5%, and the carry-over effect for 2024 is null, as a result of a second half that was even weaker than the first one. Nevertheless, our Nowcast currently indicates growth of 0.3% q/q in Q1 2024, which is higher than our December forecast.
Business climate and consumer confidence indices remained stable at a low level in February, highlighting Germany's limited economic impulse in Q1. According to our forecasts, GDP growth should be zero, after a contraction of 0.3% q/q in Q4: growth without momentum (for the time being) but also without a carryover effect (-0.2% after Q4 2023).
The last time growth was significant (in Q2 2023, with +0.6% q/q), this was explained by significant restocking (contribution of 0.5 points, after a contribution of -0.4 points in the previous quarter). A similar restocking trend could occur in Q1 2024, following a negative contribution of inventories in Q4 2023 (-0.7 points). However, this very negative figure suggests that demand in Q1 is particularly subdued, and is not expected to contribute to growth (if growth were to prove positive).
January's business confidence surveys recovered in Italy: the composite PMI index rose 2.1 points and now stands at 50.7. This improvement was driven by services, for which the PMI returned to the expansion zone after six months in contraction territory (+1.4 points, at 51.2). The companies surveyed are now reporting an increase in upcoming new business (52.5; +4.4 points), bringing employment with it (51.2). Meanwhile, the deterioration in the manufacturing sector, observed since April 2023, is continuing to slow, with the associated PMI index gaining 3.2 points in January, standing at 48.5.
January's business confidence surveys showed signs of improvement. The composite PMI index points to an expansion in activity (51.5), driven by the ongoing solid performance of the services sector (52.1). The manufacturing sector is also seemingly enjoying a bit more tailwind at the start of this year. After ten months of contraction, the associated PMI is showing signs of recovery (49.2; +3.1 points), with Spanish companies reporting a lesser deterioration of all sub-indices, with the exception of the sub-index relating to suppliers' delivery times (44.5; -3.5 points).
The start of 2024 has seen an unexpectedly strong non-farm payrolls gain, hitting 353,000 in January (+30,000 m/m) – the highest figure seen for more than a year. In addition, this figure was coupled with a significant upward revision to the December data (330,000 jobs created, compared to the initial figure of 216,000). At the same time, the unemployment (+3.7%) and participation (+62.5%) rates remained stable.
The economic situation in the UK continued to deteriorate in Q4 2023. Real GDP contracted 0.3% q/q, after falling 0.1% q/q in Q3. Although economic activity remained marginally in positive territory for 2023 as a whole (with 0.1% growth), it deteriorated throughout the year, resulting in a negative carry-over effect for 2024. The growth outlook for 2024 is even more unfavourable, as economic activity is expected to stagnate in H1 before a sluggish recovery from summer onwards.
Japan entered a technical recession in H2 2023. The first estimate of Q4 GDP indicates a modest contraction of -0.1% q/q following a more significant downturn of -0.8% q/q in the previous quarter. More symbolically, Japan lost its ranking as the world's third largest economy (in nominal GDP) to Germany. Nevertheless, the strength of economic activity in H1 2023 had given the Japanese economy a significant growth carry-over, allowing the average annual growth rate to reach +1.9% for the year (compared to +0.9% in 2022).
There is a broad consensus amongst forecasters that Eurozone quarterly growth in real GDP will gradually pick up over the year on the back of a further decline of inflation, cuts in official interest rates, investments in the energy transition and those related to NextGeneration EU. Foreign trade may also play a role. Survey data of the European Commission and S&P Global have improved since the autumn of last year but their level remains below the historical average. Based on historical relationships, their positive momentum -recent observations are better than those 3 months ago- increases the likelihood that GDP growth in the first quarter will be better than in the final quarter of 2023.
