MacroEconomic Bulletin - First half of May 2023

1. Global Outlook

Downside risks of recession. The beginning of May has been accompanied by an improvement in growth forecasts for the main euro area economies, easing the fears of a recession. In this sense, the favourable start of the year improves the outlook for the major euro area economies. Ireland leads the ranking with a GDP growth of +4.4% year-on-year, boosted by the corporate earnings of large international corporations. On the other hand, Estonia and Finland are expected to contract by -0.4% (second year in negative territory) and -0.2% respectively. In terms of the four major eurozone economies, we expect Spain to lead the ranking (+1.6%) followed, at a great distance, by France and Italy (+0.6% in both cases) and Germany (+0.1%).

Favourable evolution of the services sector. EthiFinance Ratings highlights the resilience of the services sector, which continues to improve its prospects, in view of the performance shown by the Flash PMI indicator, which in April accelerated to 56.2 points from 55 points in March. On the other hand, the manufacturing industry continues to worsen, with a PMI index that continued to decline, closing the month at 45.8 points compared to 47.3 points in the previous month, the worst figure in the last 36 months. Once again we observe a two-speed Europe, but in this case benefiting those countries with a growth model more dependent on tertiary activities (tourism and leisure activities).

Inflation is still high but falling. In April, the euro zone's headline inflation index broke the negative trend of the last six months and rebounded to +7% yoy due to higher food prices. Nevertheless, excluding the more volatile components, core inflation fell by one tenth of a percentage point to 5.6%, still at levels considerably high. In fact, and considering the two-yearly rates of change, core inflation maintains an upward trend, which supports the continuation of the current monetary policy. However, at EthiFinance Ratings we expect it to continue to normalize until it is close to target by late 2024 or early 2025.

Continued tightening of monetary policy. At the end of April and the begining of May, both the Fed and the European Central Bank raised interest rates again, although, as expected, at a slower pace of 25 bps, thus continuing the fastest hiking cycle in the history of both central banks. After this hike, the Fed's target range stands at 5%-5.25% and the ECB's at 3.75%.

Although in view of the inflation data we expect this pace of hikes to be maintained at least in the next meeting, we believe that the tightening of monetary policy could be coming to an end -in view of the historical fall in the monetary aggregate M3-, all depending on how fiscal policy ends up evolving, as the continuous increase in public spending continues to act as a brake on the translation of monetary policy towards the real economy. Our expectation is for rates to reach the range of 5.25-5.50% in the US and 4-4.25% in the case of Europe.

Debt ceiling negotiations stalled. The US Congress continues to debate whether or not to modify -or suspend- the debt ceiling (i.e. the maximum amount Congress allows the US government to borrow through debt issuance), which could lead the US economy to default as early as 1 June 2023. It should be noted that the debt ceiling does not imply an increase in spending, but rather an increase in debt to finance already committed spending. Negotiations between the Democratic and Republican parties are deadlocked over the spending cuts necessary for the latter to pass the measure. Once adopted, we do not expect further delays as the Senate is controlled by the Democratic party. The last time the debt ceiling change was approved in the US was on January 19. Although EthiFinance Ratings expects that this situation will eventually be resolved given the negative implications that a default of this magnitude would have for the stability of the global monetary and financial system, we believe that the uncertainty observed in recent years will accentuate the need to adapt public finances to a path of greater fiscal discipline, as the other alternative would simply be to eliminate it.

Life expectancy continues to improve in Europe, albeit with an increasingly aging population. Spain leads the ranking with 83.3 years, but the fertility rate is falling and is among the lowest in the European Union (1.19 children). For its part, life expectancy in France is 82.4 years, 81.45 in Portugal and 80.8 in Germany. In terms of fertility rate, France and Germany improve to 1.84 and 1.58 children respectively. In contrast, Portugal falls back to 1.35 children. This situation represents an additional source of pressure on the stability of public finances, inflation and, ultimately, the future growth potential of European economies.

2. Spanish Outlook

In the first quarter of the year, the Spanish economy remained resilient and grew at a quarter-on-quarter pace of +0.5%, above the consensus of +0.3% and in line with our forecast of +0.5%. This improvement is mainly justified by the good performance of the external sector, with tourism activity continuing to improve and anticipating an excellent summer season for this year 2023, in view of the latest PMI data. We expect the economy to maintain a similar pace of growth in the second quarter and reach the GDP levels recorded before the pandemic, making it the last of the major economies to return to the previous situation.

Moreover, the economy's good performance has been transmitted to the labour market, which continues at the highest levels of enrollment in the last fifteen years, although with an unemployment rate that has risen slightly to 13.2%, close to the structural unemployment rate of the Spanish economy. On the negative side is productivity per employee, which continues to fall and is at the bottom of the large economies in the euro area.

On the other hand, the INE has confirmed the inflation figure for April 2023, which stands at +4.1% yoy, eight tenths above that of March (+3.3%). As for its components, with an upward influence, we highlight the price of energy and fuels, which decreased to a lesser extent than in the previous month, while food influenced downwards for the first time, albeit maintaining a high growth (+12.9% yoy). In addition, we note the decrease in core inflation, with a reduction of nine tenths to +6.6% yoy (+7.5% in March).

3. French Outlook

In the first quarter of the year, the French economy left behind the stagnation registered at the end of 2022, growing at a quarter-on-quarter rate of +0.2%, in line with the consensus, due to the good performance of exports and, to a lesser extent, of private consumption -which is recovering from the negative values registered at the end of 2022-.

All in all, the French economy is expected to grow at a rate of between +0.6% and +0.7% year-on-year this year, in line with its main peers, although some moderation in the pace of growth in coming quarters is foreseeable in view of the deterioration in the main confidence indicators (for example, the business confidence indicator fell again in April) and the evolution of the manufacturing PMIs revealed a drop in the production of French factories, partly due to the effect of the protests around the pension reform.

In this regard, it should be noted that the pension reform is rooted in the necessary adoption of a fiscal consolidation path by the French government. We should not lose sight of the fact that France's public debt was close to 112% of GDP, but it is the fifth highest in the world in absolute terms, behind the US, China, Japan and the UK.

On the other hand, In April 2023 the CPI grew by +5.9%, after +5.7% in March 2023 (Final Results). This shows that inflation is still high compared to other European Union countries. Moreover, the trend seems to be stagnant if we look at the first four months of 2023 (Jan. +6.0% yoy, Feb. 6.2%, Mar. +5.6% and +5.9% in April).  Furthermore, this increase is mainly determined by the slight growth in certain factors; an acceleration in prices of energy (+6.8% yoy after +4.9%), services (+3.2% after +2.9%) and tobacco (+9.4% after +7.8%). However, the prices of manufactured goods (+4.6% after +4.8%) and food (+15.0% after +15.9%) slowed down.

4. German Outlook

In the first quarter of the year, Germany's economy is estimated to have held steady with respect to the previous quarter, thus avoiding a technical recession -in 2022Q4 the economy shrank by -0.1% quarter-on-quarter-. However, this is a provisional figure and any downward movement could lead to a technical recession. This situation is explained by the weakness observed in the global manufacturing sector, the economy is expected to grow by just +0.1% year-on-year this year in view of the main confidence indicators and the lower order backlog shown by the manufacturing PMIs. In fact, industrial production, despite the slight recovery observed in recent months, is still well below pre-pandemic levels. Expectations for 2024 are more favourable with an estimated growth of +1.1% year-on-year, although still below the country's potential growth.

In addition, inflation in Germany remains high at +7.2% in April 2023 (final results). The rate of inflation has therefore slowed for the second month in a row but remains at a high level. Looking at the basket of goods and services, food prices continued to be the biggest driver of inflation in April 2023, increasing by +17.2% yoy. Moreover, energy product prices were +6.8% higher in April 2023 than in the same month a year earlier, where we observed in natural gas prices (+33.8%) as well as in the prices of firewood (+29.8%), and consumers also had to pay significantly more than a year earlier for electricity (+15.4%).

5. Portuguese Outlook

The Portuguese economy has also been favoured at the start of the year, with a GDP growth of +1.6% quarter-on-quarter, leading the Eurozone ranking as a result of both the improvement in private consumption and the foreign sector, however, a slowdown is expected over the following quarters of the year in line with the expected performance of the economies of its main trading partners. Nevertheless, at Ethifinance Ratings we believe that it will be the services sector, mainly related to leisure and tourism, that will support a large part of the economic dynamism this year. As a result, we expect Portugal's GDP to grow in a range of +0.7%-1%.

On the other hand, the Consumer Price Index (CPI) annual rate decreased to 5.7% in April 2023 (7.4% in March 2023). This deceleration mainly reflects the base effect related to the price increases in electricity, gas and food products, registered in April 2022. However, prices in unprocessed food slowed down until +14,1% in April 2023 (after +19,3% in March 2023, yoy).