Initially estimated at +0.1% q/q, growth in the eurozone in Q1 2023 is now slightly negative, at -0.1% (after a similar drop in Q4 2022). This downward revision was driven by that of German growth. The succession of two quarters of decline in GDP defines a “technical” recession, which it is at this stage: the contraction in GDP is small and it is not broad-based to all growth components neither to all the Member States. Household consumption fell for the second quarter in a row (-0.3% in Q1 after -1% q/q in Q4), but it was the sharp drop in public consumption (in Germany), in addition to the very negative contribution of inventories, that brought the Q1 figure into negative territory. As these two developments are probably one-off, we can expect a technical rebound in Q2. We forecast +0.2% q/q. However, our nowcast model is less positive (zero growth estimated) and points to a downward risk on this forecast.
Apart from consumer confidence, which once again recovered slightly in May, business climate surveys all developed negatively. In the European Commission’s Economic Sentiment Indicator (ESI), the decline was the most pronounced in retail trade, then in services, industry and, to a lesser extent, construction. In industry, this is the fourth consecutive drop, for both the ESI and the composite PMI. At 44.8, the composite manufacturing PMI is well in contraction territory and at its lowest since mid-2012 (excluding the Covid-19 period). The services PMI is significantly higher, at 55.1, but deteriorated slightly in May, for the first time since November 2022.
The situation on the labour market remains positive: a continued drop in the unemployment rate (-0.1 point to 6.5% in April), dynamic job creation (+0.6% q/q in Q1 2023), PMI "employment" component comfortably in the expansion zone (53.8) and moderate concerns among households about future unemployment.
News on the inflation front was positive in May: the headline fell 0.9 points (to 6.1% y/y) and core inflation 0.3 points (to 5.3%). The decline of the latter seems to have started, but as Isabel Schnabel points out, it is not enough for core inflation to have peaked to claim victory. Against this backdrop, the ECB opted for a further 25 bp increase in its key rates in June (bringing the deposit rate to 3.50%). It shouldn't stop there: a further 25 bp hike in July is highly likely and even as uncertainty increases, we expect a final similar rise in September.
Hélène Baudchon (article completed on 22/06/2023)
