MacroEconomic Bulletin - First half of July 2023



In June, the Composite PMIs of different economies point to a worsening of the economic situation caused by the manufacturing sector. As for the euro zone, the outlook offered by this indicator worsens compared to that offered by the flash estimate, falling definitively below the contraction zone (49.9 points against the 50.3 initially estimated). This drop is mainly due to the manufacturing sector, which reported declines in production, while the services sector continued to expand, albeit at a weaker pace. The picture is similar in the main economies of the euro zone, with declines of around 3 points in the composite index, which pushed France (47.2) and Italy (50.6) into the contraction zone. China and the United States, on the other hand, while remaining in the expansion zone (52.5 and 53.2 respectively), also showed sharp falls of more than one point, with the services sector being the driving force of both economies. Thus, the PMIs point to an unfavorable situation since, even though the services sector is keeping the economies afloat, we could see a reversal of this panorama in the second half of the year given the observed slowdown in consumption.

U.S. inflation moderates in June, resulting in a lower forecast interest rate at year-end. The U.S. consumer price index slowed to +3% yoy in June, down from +4% in May, according to data released by the Bureau of Labor Statistics (BLS). This is the lowest level since before the pandemic, marking the 12th consecutive month that inflation has slowed, which peaked at +9.1% yoy in June 2022. Similarly, core inflation also decreases to +4.8% yoy in June 2023 (after +5.3%). The main drivers for this decline are interest rate increases and lower energy costs. Amid this outlook, the two additional rate hikes promised by Jerome Powell at the last meeting fall short of market expectations, although we maintain our expectations for a further 25 basis point rate hike to a range between 5.25% and 5.5% at the July 26 meeting. On the other hand, the U.S. labor market remains robust, creating 209,000 jobs in June, which led to a fall in  the unemployment rate to 3.6% of the labor force, despite the monetary policy situation. Thus, at present, we do not see a significant effect of rate hikes on the U.S. labor market, although the full effect of monetary policy on the economy usually lags in becoming noticeable.

Unlike the rest of the world's major economies, China struggles with low inflation. In June 2023, China's CPI registered a price change of 0% (0.2% in May), the lowest figure in the last 28 months. While the country has kept interest rates low in order to revive the economy, the high uncertainty about the situation of its real estate sector and the slowdown in the manufacturing sector are leading to weak demand. All in all, given the international environment, we do not expect the Chinese economy to achieve its growth target of +5% yoy this year. Additionally, we point out the risks of deflation, which could be a particular constraint for the country, considering the high level of private debt (around 180% of GDP in 2022), increasing the financial effort to cope with it. As for its effects on the international inflationary outlook, this fact could be a source of price relaxation, especially on the cost side in those companies where China is part of their production chain. However, this effect could be ambiguous, depending highly on its structure.


The INE confirms June's inflation figure, standing at +1.9% yoy (+3.2% yoy in May), below the mandate set by the ECB (+2.0% yoy). Likewise, core inflation, although still high, maintained its downward trend to +5.9% yoy (+6.1% yoy in May). As for the main drivers of this slowdown, the impact of fuels (-7.6%) and energy (-12.7%) stands out. In addition, food, albeit continuing to exhibit price rises, is slightly softening (+10.3% yoy vs. +11.8% in May). This trend towards moderation is common to the different groups of food goods, except for oil, which continues to present an upward trend due to the drought experienced in the national territory. In terms of inflationary pressures, leisure and culture (+5.2% yoy) had a significant impact due to the increase in package tours.

Furthermore, among the economic indicators that have been published in the last two weeks, the Industrial Production Index and tourist arrivals for May are noteworthy. The industrial production presented a more favorable tone after the drop recorded in April, although still reflecting signs of weakness. In this sense, industrial production registered a slight fall (-0.1% yoy and corrected for seasonal and calendar effects), although not as sharp as that of April (-4.2%). However, in month-on-month terms, it registered an increase (+0.6% compared to -1.9% in April). By branches of activity, the ones that presented the highest growth rates were the tobacco industry (+13.6% mom), clothing (+7.3%) and automotive (+7.2%). On the other hand, energy (-2.8%) and intermediate goods, such as non-metallic mineral products, registered the largest contractions.  Additionally, data on tourist arrivals for the month of May was also released, which reached 8.2 million, marking an all-time high and 4.0% above pre-pandemic levels.

As for the labor market, the trend of job creation slowed down in June, although the number of registered unemployed continued to fall. Thus, the number of registered workers increased more slowly than usual in the month of June, with an increase of 54,541 people (a decrease of 20,119 in seasonally adjusted terms). This slowdown could be due to an anticipation of the typical hiring for this month, but also to the easing trend in the growth of the economy. On the other hand, unemployment continues to fall, with a reduction of 50,268 people (11,000 in seasonally adjusted terms), placing the number of unemployed at the lowest level since 2008.


In June 2023, the INSEÉ confirmed the final results in terms of CPI, year on year, consumer prices grew by +4.5% in June 2023, after +5.1% in May. In line with most EU countries we note a slowdown in the index, giving companies a break on costs. This decrease in inflation resulted from a year-on-year decline in energy prices (‑3.0% after +2.0%), and from a slowdown in food prices (+13.7% after +14.3%). Likewise, year on year, core inflation slightly decreased, reaching +5.7% in June 2023, after +5.8% in May. On the contrary, service prices rose by 3.0% yoy, the same rate as in the previous month, where we observe an increase in the prices of "other services", mainly due to an acceleration in accommodation services.

Additionally, in May 2023, output expanded again in the whole industry over a year +1.5%. In the manufacturing sector, output of the last three months (March to May 2023) was higher than that of the same months a year ago in the manufacturing industry (+2.1%). Moreover, if we consider month-to-month variation, in May 2023, output increased in the manufacturing industry (+1.4% after +0.6%), as well as in the whole industry (+1.2% after +0.8%). We can also observe how output increased in most industries, for instance it recovered in the manufacture of food products and beverages (+1.6% after ‑0.5% mom). It increased strongly in the manufacture of coke and refined petroleum (+45.1% after +22.1% mom) with the end of strikes in refineries. Regarding the over a year period, output expanded markedly in the manufacture of transport equipment (+17.3%), particularly in the manufacture of motor vehicles and, on the contrary, output declined in mining, quarrying, energy, and water supply (‑1.9%).


The Statistisches Bundesamt confirms the flash estimate for inflation (CPI) in Germany, standing at +6.4% in June 2023. On a monthly basis, in May 2023, the inflation rate was +0.3%, therefore the rate of inflation increased slightly again after slowing for three months in a row.  This implies the need to continue to reduce inflationary pressures, seeing how other EU countries have managed to reduce their prices considerably. As a main driver, food prices remain the biggest one, +13.7% yoy in June 2023.  Energy product prices in June 2023 were +3.0% higher than in the same month a year earlier (after +2.6% in May 2023). The fact that the increase in energy prices has been below average since March 2023 is mainly due to a base effect from the previous year and measures of the Federal Government's third relief package, causing prices not to rise excessively.  In addition, the prices of services were up +5.3% yoy in June, one of the main drivers is the short-distance rail tickets, which cost much more in June 2023 (+65.2% yoy) despite the introduction of the Germany ticket.

On the other hand, in May 2023, the production index of the industry sector increased by +0.7% interannual (Flash estimates). Nevertheless, month-to-month, in May 2023 its index decreased by -0.2% after seasonal and calendar adjustments. Since January we have observed a steady trend in the index, around its average of 100, which implies that the pre-pandemic score has not yet been recovered. Within the industry, the development of production varied greatly between the individual economic sectors. The manufacture of basic pharmaceutical products and pharmaceutical preparations had a significant negative impact in May (-13.1% mom), while the manufacture of motor vehicles had a positive influence +4.9% mom. In addition, excluding energy and construction, production in the industry sector increased by +0.2%, with capital goods production rising by +1.3% mom. However, the production of consumer goods decreased by -1.2% and intermediate goods by -0.5% mom. Finally, on a year-over-year basis, energy-intensive industrial branches registered a decline of -12.4%.


Portugal's INE has confirmed the flash inflation figure for June, standing at +3.4% yoy (+4.0% in May), maintaining a downward trend. This moderation in inflation is the result of the fall in fuel and energy (-18.5% yoy). However, the groups that continue to exert the greatest inflationary pressures are food (+8.5%) and hotels and restaurants, with tourism at record highs. In addition, core inflation also maintains a downward trend but at a slower pace, standing at +5.3% yoy (+5.4% in May).

The economic indicators for May point to a mixed picture, while the labor market evolves positively, favored by the services sector, industry continues to contract. As for the labor market, the situation remains favorable, with a decrease in unemployment in May 2023. Thus, Portugal reverses the trend shown at the beginning of the year, with increases in unemployment. As a result, the unemployment rate fell to 6.4% of the labor force (6.5% in April), due to both an increase in the number of registered workers and a decrease in the number of unemployed. On the other hand, the Industrial Production Index continues to present negative rates, pointing to a contraction in industrial production of -4.5% in May (-6.9% in April).