MacroEconomic Bulletin - First half of December 2023

#China grapples with a distinct and persistent challenge –the ongoing struggle against deflation. The Chinese #CPI has experienced a year-on-year decline of -0.5%, a negative trend persisting since July. The downturn in prices is attributed to the real estate crisis, economic slowdown, and waning consumer confidence. This poses additional challenges for policymakers, as it may lead to further economic slowdown by postponing investment and consumer decisions in anticipation of lower prices. Additionally, deflation becomes a concern in the context of debt levels, as it could result in debt growing at a faster pace than nominal GDP, a significant challenge for a country with high private debt levels, reaching 193% of its GDP.

#CentralBanks: In November, the US inflation rate declined to +3.1% year-on-year, prompting the #FederalReserve to maintain interest rates at its year-end meeting, meeting expectations. Current interest rates in the US range from 5.25% to 5.5%, with attention now turning to the timing of the potential start of a rate-cut cycle. Notably, the Fed's dovish tone, evident in its dot plot, suggests no further interest rate hikes in the coming years. However, it anticipates a 75-basis-point reduction by 2024 (4.5%-4.75%), followed by a 100-point cut in 2025 (3.5%-3.75%) and 70 points in 2026 (around 3%), subject to price developments. The Central Bank also adjusted its forecasts, raising the 2023 projection to +2.6% (from +2.1%) but projecting a slight deceleration next year (+1.4% vs. +1.5% previously estimated). Inflation is expected to end the year at +2.8%, and the 2% target is not expected until 2026.

Likewise, the #ECB has decided to maintain interest rates in the Eurozone as expected. Although inflation has declined in recent months (+2.4% yoy: November), it is likely to rise again temporarily in the short-term. The ECB shows a strong priority on inflation, considering that interest rates will remain at high levels for a sufficiently long time, to contribute to that objective. As for the #forecasts, inflation is revised downwards compared to last month, expected to gradually decline over the next year, before approaching the two percent target in 2025 (2024: +2.7% and 2025: +2.1%). Moreover, the economy is expected to recover due to rising real incomes -as people benefit from falling inflation- and improving foreign demand (2024: +0.8% and 2025: +1.5%). For future steps, we do not expect interest rates to be reduced in the first half of next year after the conservative tone given by the president, where ECB will expect assessment of the inflation outlook and its transmission to the real economy.

Finally, the #BankofEngland opted to maintain interest rates, holding them at 5.25%. Notably, it struck a more hawkish tone, dispelling expectations of a rate cut, given that inflation in England still stands at +4.3% yoy as of November. Meanwhile, the English economy faces challenges, experiencing a -0.3% GDP decline in October. However, recent IMF forecasts suggest a modest growth trajectory for the country in 2023 and 2024 at +0.5% and +0.6%, respectively.

Focusing on some of the major eurozone economies…

#Spain: Confirmed flash #inflation data places the overall index for November at +3.2% yoy (down from +3.5% in October), with core inflation at +4.5% (+5.2%). Noteworthy contributors to the decrease include lower fuel and energy costs -the latter boosted by renewable production- and, to a lesser extent, reduced expenses on tourism packages and food. Turning to expectations, the latest #PMIsurveys available are for November which present a nuanced picture. While the service sector continues in the expansion zone (at 51.1 points), the manufacturing sector remains below the contraction zone at 46.3, showing signs of improvement from October's 45.1. This improvement, however, is driven by the consumer goods sector, closely linked to the economic cycle and the holiday season, while capital goods continue to decline.

#France: In November 2023, #inflation in France increased by 3.5%, +0.1% compared to the preliminary results reported by INSÉE. This decrease was attributed to a slowdown in year-on-year energy prices (+3.1%) and, to a lesser extent, food prices (+7.7%). Core inflation also decreased to +3.6% in November. Meanwhile, the Flash HCOB France Composite #PMI for December revealed a contraction in the French economy, with a reading of 43.7, the fastest decline in over three years. The EU's second-largest economy is sinking into recession, where contractions in both the services and manufacturing sectors have intensified compared to the previous month, attributed to weak demand, reduced customer purchasing power, and a general economic slowdown. HCOB's Flash PMI for the manufacturing sector reached its lowest level since May 2020, registering 42.0, with concerns expressed about the future outlook for French industry.

#Germany:  In November 2023, Germany's annual #inflation rate was confirmed at +3.2%, marking the fifth consecutive month of a slowdown. December flash #PMI indicated Germany ends 2023 with further fall in activity and uptick in price pressures, with both the service (index at 48.4) and manufacturing sectors (index at 43.4) in the contraction zone. This supports the view of a second consecutive quarter of negative growth by the end of the year, led by the manufacturing sector. Notably, companies have turned optimistic about future output after seven months of pessimism, aligning with the expectation of a manufacturing sector recovery in the coming year.

#ESG: In the #social area, two relevant reports. The first one, made by UNICEF, shows that from 2014 to 2021 more than 1/5 children live in poverty in 40 of the world's richest countries. #Children'sLivingConditions can improve regardless of a country's wealth. For instance, Poland, Slovenia, Latvia and Lithuania, which are not among the richest OECD or EU countries, have achieved significant reductions in child poverty rate: ratio decreases of around 38% in Poland. Meanwhile, certain countries with higher incomes recorded larger increases in the percentage of children living in households with financial difficulties (United Kingdom: ratio increases of 20%, and France, Norway and Switzerland: 10%). The second report, made by Eurostat, is focused on the #QualityofLifeIndicators in Europe. Among other conclusions, the report highlights different regional views between the north and the south: people in the north and west tend to be happier with their living conditions than people in the Baltic countries, the Mediterranean area and the eastern parts of the EU, among other thanks to their higher economic development.