EU Economy: Weekly Commentary – December 11, 2023
Eurozone View Synopsis
Given Europe's current fragility and the increasing likelihood of a recession, the ECB focus is shifting from the inflation fight to averting a recession. No further rate hikes are expected, and cuts could start earlier than expected.
The economy is fragile and the downward trend in inflation, together with signs of a weak economy, are providing room for a pause by the ECB. Economic growth in Q3 was negative, offset by a modest improvement in PMIs. Seasonality will mean that we expect an increase in retail sales, but we do not expect this to be trend to persist in February data. The base case scenario that the Eurozone is facing a period of stagnation for the coming quarters. The next ECB meeting on December 14 will show their thoughts on how to avoid a recession and no change in rates. If Inflation continues to decline while the broader economy is suffering, there is may be a discussion on rate cuts.
The economy is fragile and the downward trend in inflation, together with signs of a weak economy, are providing room for a pause by the ECB. Economic growth in Q3 was negative, offset by a modest improvement in PMIs. Seasonality will mean that we expect an increase in retail sales, but we do not expect this to be trend to persist in February data. The base case scenario that the Eurozone is facing a period of stagnation for the coming quarters. The next ECB meeting on December 14 will show their thoughts on how to avoid a recession and no change in rates. If Inflation continues to decline while the broader economy is suffering, there is may be a discussion on rate cuts.
Economic growth
Growth is weakening, and this trend is expected to continue in coming quarters. Don’t expect improvement until H2 2024.
In the third quarter of 2023, the GDP in the eurozone saw a slight decrease of 0.1 per cent compared to the previous quarter. Year-on-year comparisons showed a stable GDP in both the eurozone and the EU, following increases of 0.6 per cent and 0.5 per cent.
Looking deeper indicates that household final consumption expenditures experienced a modest 0.2 per cent increase, paralleled by a marginal 0.1 per cent rise in government expenses across both zones. However, these increments were counterbalanced by a negative impact from changes in inventories, reflecting a decline of -0.3 per cent. Additionally, contributions from gross fixed capital formation and external balance were minimal, failing to significantly influence the overall economic landscape. Employment figures demonstrated a 0.2 per cent increase, showing a slight improvement compared to the previous quarter's 0.1 per cent rise.
Looking ahead, our projections suggest a further decline in the economy for the last quarter of the year. We anticipate continued economic stagnation, foreseeing no recovery until at least mid-2024.
In the third quarter of 2023, the GDP in the eurozone saw a slight decrease of 0.1 per cent compared to the previous quarter. Year-on-year comparisons showed a stable GDP in both the eurozone and the EU, following increases of 0.6 per cent and 0.5 per cent.
Looking deeper indicates that household final consumption expenditures experienced a modest 0.2 per cent increase, paralleled by a marginal 0.1 per cent rise in government expenses across both zones. However, these increments were counterbalanced by a negative impact from changes in inventories, reflecting a decline of -0.3 per cent. Additionally, contributions from gross fixed capital formation and external balance were minimal, failing to significantly influence the overall economic landscape. Employment figures demonstrated a 0.2 per cent increase, showing a slight improvement compared to the previous quarter's 0.1 per cent rise.
Looking ahead, our projections suggest a further decline in the economy for the last quarter of the year. We anticipate continued economic stagnation, foreseeing no recovery until at least mid-2024.
Manufacturing commentary
Manufacturing improved in November, but inflationary pressures remain on services and input prices. We note that the labour market is starting to experience difficulties.
In the eurozone, the streak of six consecutive months of contraction shows signs of improvement. November witnessed the Eurozone services PMI at 48.7 and the composite PMI at 47.6, surpassing expectations and outpacing the October figures of 47.8 and 46.5, respectively. Notably, Germany and Italy demonstrated increases, with France maintaining stability compared to October.
However, amidst these positive signals, German industrial orders experienced an unexpected setback in October. They plunged by 3.7 per cent from the previous month, significantly below the 0.2 per cent increase expected. Year-on-year figures reveal a substantial decline of 7.3 per cent, marking the fourth consecutive month of decline. The downturn was predominantly led by a sharp 13.5 per cent drop in new orders within the machinery and equipment sector.
Employment conditions saw a decline for the first time since January 2021. Moreover, while demand conditions persistently remain soft, the landscape is further complicated by a slight uptick in pricing pressures. Input prices rose at the fastest pace since May, adding to the challenges faced by businesses.
In the services sector, inflationary pressures persisted across the eurozone economy in November, with both input costs and output prices witnessing a higher rate of increase during the month. These dynamics signal a complex scenario for businesses, as they face a delicate balance between improving conditions and increasing challenges in both the industrial and services domains.
In the eurozone, the streak of six consecutive months of contraction shows signs of improvement. November witnessed the Eurozone services PMI at 48.7 and the composite PMI at 47.6, surpassing expectations and outpacing the October figures of 47.8 and 46.5, respectively. Notably, Germany and Italy demonstrated increases, with France maintaining stability compared to October.
However, amidst these positive signals, German industrial orders experienced an unexpected setback in October. They plunged by 3.7 per cent from the previous month, significantly below the 0.2 per cent increase expected. Year-on-year figures reveal a substantial decline of 7.3 per cent, marking the fourth consecutive month of decline. The downturn was predominantly led by a sharp 13.5 per cent drop in new orders within the machinery and equipment sector.
Employment conditions saw a decline for the first time since January 2021. Moreover, while demand conditions persistently remain soft, the landscape is further complicated by a slight uptick in pricing pressures. Input prices rose at the fastest pace since May, adding to the challenges faced by businesses.
In the services sector, inflationary pressures persisted across the eurozone economy in November, with both input costs and output prices witnessing a higher rate of increase during the month. These dynamics signal a complex scenario for businesses, as they face a delicate balance between improving conditions and increasing challenges in both the industrial and services domains.
Retail sales prospectus
Retail sales ticked up modestly in October. In the coming months, we are expecting increases just due to the season, however, in February we can expect more modest growth.
Retail trade volumes have undergone a sustained decline spanning nearly two years. However, there are indications of stabilization, with expectations for an uptick in the upcoming months, due to the seasonal trends. October witnessed a modest 0.1 per cent increase, primarily driven by robust growth in Croatia, Germany, and the Netherlands. Conversely, Italy and France experienced noteworthy declines during this period.
Overall, there has been a substantial correction of 4.1 per cent in retail volumes from their peak in November 2021. Several factors have contributed to this correction, including a decline in consumer purchasing power due to high inflation and elevated interest rates. Moreover, the surge in spending on goods during the pandemic, coupled with the subsequent shift toward spending on services during the reopening phase, has exerted considerable pressure on retail volumes in recent times.
Our perspective on the retail landscape leans toward a pessimistic outlook. While there might be a seasonal increase in December and possibly January, driven by the holiday season, we anticipate a subsequent decline due to rising unemployment and reduced consumer spending.
Retail trade volumes have undergone a sustained decline spanning nearly two years. However, there are indications of stabilization, with expectations for an uptick in the upcoming months, due to the seasonal trends. October witnessed a modest 0.1 per cent increase, primarily driven by robust growth in Croatia, Germany, and the Netherlands. Conversely, Italy and France experienced noteworthy declines during this period.
Overall, there has been a substantial correction of 4.1 per cent in retail volumes from their peak in November 2021. Several factors have contributed to this correction, including a decline in consumer purchasing power due to high inflation and elevated interest rates. Moreover, the surge in spending on goods during the pandemic, coupled with the subsequent shift toward spending on services during the reopening phase, has exerted considerable pressure on retail volumes in recent times.
Our perspective on the retail landscape leans toward a pessimistic outlook. While there might be a seasonal increase in December and possibly January, driven by the holiday season, we anticipate a subsequent decline due to rising unemployment and reduced consumer spending.
German inflation
As in the rest of the EU, inflation is coming down. However, the last leg of getting inflation to the 2% target will be the most difficult to achieve.
November 2023 saw a decrease in the year-on-year change in the consumer price index (CPI) to 3.2 per cent, down from October's 3.8 per cent. This marks the fifth consecutive month of lower inflation, indicating measures at controlling inflationary pressures are working.
One significant driver to this moderation has been the downward trajectory of energy prices, down by 4.5 per cent compared to the previous year. This decline has exerted a damping influence on the overall inflation rate, primarily stemming from the elevated energy prices observed in 2022. Notably, while most energy prices declined, electricity exhibited a marginal increase of 1.6% YoY in November.
Food prices, on the other hand, continued their upward trajectory, albeit at a slower pace. The 5.5 per cent YoY increase in November represents a slight moderation from the 6.1 per cent growth observed in October. Within this category, specific products like fruit and olive oil saw substantial spikes, recording increases of 12 per cent and 43.5 per cent, respectively, in annual terms.
Service prices, despite experiencing a reduction, showcased minimal decline. Inflation on services is a difficult one to bring down and is very sticky around all economies.
Overall, the overall inflation rate is coming down towards the target, and we do not expect to see any increases in the coming months. Nevertheless, we think that the last end of the path to bring inflation to the target will be difficult.
November 2023 saw a decrease in the year-on-year change in the consumer price index (CPI) to 3.2 per cent, down from October's 3.8 per cent. This marks the fifth consecutive month of lower inflation, indicating measures at controlling inflationary pressures are working.
One significant driver to this moderation has been the downward trajectory of energy prices, down by 4.5 per cent compared to the previous year. This decline has exerted a damping influence on the overall inflation rate, primarily stemming from the elevated energy prices observed in 2022. Notably, while most energy prices declined, electricity exhibited a marginal increase of 1.6% YoY in November.
Food prices, on the other hand, continued their upward trajectory, albeit at a slower pace. The 5.5 per cent YoY increase in November represents a slight moderation from the 6.1 per cent growth observed in October. Within this category, specific products like fruit and olive oil saw substantial spikes, recording increases of 12 per cent and 43.5 per cent, respectively, in annual terms.
Service prices, despite experiencing a reduction, showcased minimal decline. Inflation on services is a difficult one to bring down and is very sticky around all economies.
Overall, the overall inflation rate is coming down towards the target, and we do not expect to see any increases in the coming months. Nevertheless, we think that the last end of the path to bring inflation to the target will be difficult.
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No representation or warranty, express or implied, is made by Dolfin Fund Management Ltd or any of its directors, officers or employees as to the accuracy, completeness or fairness of the information in this document and no responsibility or liability is accepted for any such information (save in respect of fraudulent representation or warranty).
This document may not be reproduced, redistributed or passed on to any other person or published, in whole or in part, for any purpose without the prior written consent of Dolfin Fund Management Ltd.
Dolfin Fund Management Ltd, a company registered in Malta (registered number C71750), authorised and regulated by the Malta Financial Services Authority (licence number IS71750).
Copyright © 2023 Dolfin Fund Management Ltd. All rights reserved.