MacroEconomic Bulletin - Second half of June 2023

1. Global outlook

Eurozone business output growth came close to stalling 50.3 points (52.8 in May), according to the Flash PMI survey data by S&P Global, pointing to renewed weakness in the economy after the brief growth revival recorded in the spring. Inflows of new orders fell for the first time since January, employment growth slowed and future output expectations also deteriorated, reflecting weak demand, which will affect total activity in July. However, more encouragingly, the slowdown was accompanied by a marked cooling of inflationary pressures. Input costs rose at the slowest rate since December 2020 and average selling prices for goods and services rose at the weakest rate since March 2021. In the USA, we observe a similar path as in Europe, 53.0 points (May: 54.3), US economic upturn slows in June as dependence on services grows. Manufacturers weighed on the overall expansion, as goods producers recorded a solid decline in production after three months of growth, 46.9 (May: 51.0). On the contrary, robust growth continued to be recorded in the service sector, albeit with the rate of expansion cooling at 54.1 (May: 54.9).

Euro zone inflation continues its moderating trend, with CPI falling again in June. According to the first estimate presented by Eurostat, euro zone inflation stood at +5.5% yoy in June, six tenths less than in May (+6.1% yoy). Nevertheless, core inflation - which does not take into account the most volatile components - remained more sticky, rising to +5.5% yoy (+5.3% in May). Likewise, the inflationary outlook of the main economies of the euro zone shows great disparities, with countries where inflation is slowing down at a faster pace -as is the case of Spain or France but the latter still at an elevated rate- while in others, such as Germany, inflation is more resistant. Thus, the outlook for monetary policy actions is more complex, with a mixed environment, in addition to a labor market that remains resilient despite the rate hikes. However, at the Sintra Forum, Christine Lagarde already anticipated a new rate hike for the ECB’s July meeting.

The CPI in the United Kingdom has not slowed down and stands at +8.7% (yoy) in May 2023, far behind neighboring EU countries. Both general CPI and core CPI have been higher than expected by the UK authorities. Given this situation, it can be seen that inflationary pressures in the UK are not under control and call for additional interest rate increases. In this context, on June 23, 2023, the Bank of England (BoE) raised the interest rate by +50 basis points to +5.00%. In addition, it points out that further rate increases may be necessary to moderate inflation. On the other hand, according to the Office for National Statistics (ONS), the quarter-on-quarter change in GDP was +0.1%, despite expectations of a contraction. This improvement in the UK forecast is in line with the upward revision published by the BoE, which,according to its May report, no longer expects a recession for the coming years (+0.25% in 2023 and +0.75% in 2024 compared to -0.5% and -0.25% estimated in February, respectively). Therefore, given the continued and persistent inflation, further interest rate increases in the UK will be necessary, and it will also be important to see how economic agents act in response to such interest rate increases and how this will affect the economy and its growth in the following quarters.

2. Spanish outlook

The INE has revised upwards the GDP growth for the first quarter of the year, registering a quarter-on-quarter change of +0.6% (+0.5% previously estimated). Likewise, the year-on-year figure also improved, standing at +4.2%, compared to the +3.8% initially estimated, reaching pre-pandemic GDP levels. Thus, the GDP expansion was driven by the good performance of the foreign sector and investment, although the latter was insufficient to counteract the downward trend in household consumption. As a result, external demand contributed +1.5 points to quarter-on-quarter growth, while domestic demand subtracted -0.9 points. For this quarter, the short-term indicators point to a continuation of the growth trend, which we expect to slow down slightly in the second half of the year due to the effects of the tightening of financial conditions. Nevertheless, due to the favorable evolution we foresee in the first part of the year, leading to a pull effect in the second semester, EthiFinance Ratings have revised upwards its forecasts for this year to +2.0% (+1.9% previously).

On the other hand, inflation continued to moderate in June, down by more than one point compared to May, to +1.9% (Flash estimate, +3.2% in May), its lowest level since April 2021. Core inflation, meanwhile, also continues to show a downward trend although at a slower pace, registering a variation of +5.9% (+6.1% in May). This moderation is mainly due to the effect of fuels, electricity and food, highly influenced by the large price increases experienced last year, although other price indicators also point to a moderation of the inflationary cycle in Spain. In this sense, the Industrial Price Index as well as the Export and Import Price Indices show negative rates (-6.9% yoy, -1.9% and -4.9% respectively), representing a slight easing of the cost increases experienced in the past year.

3. French outlook

According to the INSEE, the Consumer Price Index (CPI) is expected to rise by +4.5% (Flash Estimate) in June 2023 compared to the previous year. This result is mainly caused by the steep drop in energy prices from +2.0% yoy in May to -3.0% in June 2023. In addition, food prices are also expected to slow down in June (+14.3% March vs +13.6%, yoy). Moreover, the INSEE expects the price of services to keep growing at the same year-on-year rate as last month (+3.0%), and those of manufactured goods should slightly accelerate due to the late start of summer sales this year. Thus, from April onwards, we observed a downward trend in prices, as a result of the monetary policy decision on interest rates.

Furthermore, in June 2023, neither the business climate nor the employment climate were able to improve their levels of expectations and remain on a stable trend. Concerning the business climate, it remains at its long-term level and compared to previous months, the trend is the same (Mar. 23: 103, Apr. 23: 102 and May 23: 100). This stability is the result of mixed movements in the different sectors: the business situation has improved a little in manufacturing industry and in retail trade compared to May, but it has kept deteriorating in building construction, while it is stable in services. On the other hand, we cannot observe big differences in the employment climate, which is also stable in June 2023, remaining above its long-term average, as a result of people not perceiving an excessive increase in the workforce in services (excluding temporary work agencies) next month. This shows that the service sector by itself is not able to generate higher confidence rates in France, so a rebound in other sectors will be necessary to generate greater confidence, specifically in the employment climate.

4. German outlook

After the decreasing trend presented in the past months, Germany's inflation rate rebounded in June to +6.4% yoy (+6.1% in May). Likewise, core inflation presented a similar trend with a rise to +5.8% (+5.4% in May). By components, the biggest driver continues to be food prices, with an above-average variation of +13.7% yoy. However, all components presented a decreasing trend except for services which, according to the statistics office, the rise is explained by the transport sector. For instance, in June of last year, the 9-euro ticket measure was approved -not currently in force- so the statistical effect would have contributed negatively, partly causing this upturn in inflation.

On the other hand, forward-looking indices point to a weaker outlook with declines in expectations. On the supply side, the Ifo business climate index fell to 88.5 points in June (91.5 in May), a drop in both the expectations index and the current situation index. Similarly, the GfK consumer sentiment, after eight consecutive improvements, fell in July to -25.4 (-24.4 in June). This picture coincides with that revealed in the June Flash PMI, which recorded a drop (the composite to 50.8 points from 53.9), with industry remaining below the contraction zone (41 points). Thus, the expectation indices point to a further contraction of German GDP in the second quarter, although the Bundesbank reported in its monthly report that German GDP is expected to rebound again on the back of rising wages and a more favorable business climate.

5. Portuguese outlook

According to the Portuguese INE, the Consumer Price Index (CPI) annual rate is estimated to have decreased to +3.4% in June 2023 (+4.0% in May). Similarly to most of the EU countries, we see inflationary pressures reducing considerably, in a context where last June 21, 2023 the ECB made a further increase in interest rates to +4.0%. Year-on-year, one of the main drivers of this decline is the decrease in energy prices -18.8% (-15.5% in May), due to the base effect of higher energy prices in 2022. In addition, we also see a slight decrease in the growth of unprocessed food, shifting from +8.9% in May to +8.5% in June 2023. On a monthly basis, the CPI monthly is estimated to be +0.2% (-0.7% in May and +0.8% in June 2022).

On the other hand, the consumer confidence index continues to increase despite the stabilization of the business climate in the economy. One of the main reasons for this is that the balance of expectations about the future development of the country's economic situation increased significantly between April and June. In addition, the balance of expectations for future price developments declined in June to the lowest value recorded since February 2021. Nevertheless, despite this good growth path, the index is currently slightly below the figures for the eurozone as a whole. Moreover, the business climate stabilized in June. Confidence indicators increased in Construction and Public Works and Services, and decreased in Manufacturing and Trade.