European Growth Stalls, US Wage Inflation Accelerates, China is Back
Economic news and commentary for January 31, 2023
Euro Area, Italy, France GDP
After Germany’s GDP release yesterday, we got clarity on GDP growth for two other large European economies and the region as a whole. The news was similar to Germany’s in that there was little to no growth across the continent to end 2022. France’s GDP did manage to grow but just by 0.1% QoQ, down from the 0.2% QoQ pace in Q3 2022. The largest drag on GDP was a -0.9% QoQ decline in household consumption after it had seen light growth in the two quarters before. The underlying drivers of this component falling were less food spending (-2.8% QoQ) and less energy spending (-5.5% QoQ) which are responses to efforts to reduce exposure to inflationary goods in anticipation of shortages. The decline in consumption also led helped imports to fall which led to a net positive impact on GDP (net foreign trade up 0.5% QoQ). Gross fixed capital formation (0.8% QoQ) in both goods and services both did well to offset the decline in consumer demand. In the end, France avoided a contraction and may be able to avoid a recession if circumstances do not drastically deteriorate.
Italy, on the other hand, was not able to avoid negative growth in Q4 2022 as GDP fell -0.1% QoQ after a relatively strong 0.5% QoQ was reported last quarter. Though details were not released in this report, the decline was blamed on declines in the agriculture, forestry & fishing and industry sectors. Additionally, there was a negative contribution by the domestic component (gross of change in inventories) and a positive one by the net export component.
In the end, euro area GDP growth was reported at just 0.1% QoQ and 1.9% YoY in Q4 2022, down from 0.3% QoQ in Q3 2022. Most member nations reported a slight increase or a slight decline with a few exceptions, Ireland at 3.5% QoQ growth and Lithuania at -1.7% QoQ growth. This sets up for a worrying start to 2023. Many are projecting further declines in growth to come as financial conditions continue to tighten and inflation remains a problem (at least in the near-term). Many countries are reporting weakness in consumer demand which will likely be the main component of the diminishing of growth in 2023. Just look at Germany’s -5.3% MoM decline in real retail sales in December for an example of that coming weakness. The biggest question will be how this affects the labor market since firms are caught between demand destruction and labor shortages. For now, major layoffs have been avoided, but tightening economic conditions will eventually cause businesses to by more scrupulous in financial decisionmaking.
US Employment Cost Index
The US Employment Cost Index grew 1.0% QoQ and 5.1% YoY in Q4 2022, up from 5.0% YoY in Q3 2022. With another strong growth in wages, 2022 ends with moderately higher wage inflation thanks to raises across all sectors. Both private and public compensation grew 1.0% QoQ and were up 5.1% YoY and 4.8% YoY respectively. The service sector continued to be on the higher end of wage growth with wages for services occupations growing 6.9% YoY, and the broaded services-providing industry seeing growth of 5.1% YoY. Wage growth in the goods sector was only slightly weaker at 4.6 YoY. This report changes the narrative on wage inflation since it contradicts the cooling that has been seen in average hourly earnings releases in the last few jobs reports. The FOMC will likely act a bit more hawkishly in response to the slight acceleration in wage growth as it has been zeroing in on this type of inflation in the past few months because it believes that high wage inflation will cause goods and services prices to be stickier. On the other hand, this tight labor market will be supportive of employment if an economic downturn is around the corner in 2023. Firms are clearly still having an issue filling out their labor forces even if demand is shrinking.
Canada GDP
Canadian GDP grew 0.1% in November and is expected to be unchanged in December. This means that GDP likely grew 0.4% in Q4 2022 and 3.8% for the full year of 2022. In general, increases in the retail, utilities, and public sectors were offset by decreases in the wholesale, finance and insurance, and mining, quarrying, and oil and gas extraction sectors. The Canadian economy was also helped by the removal of travel restrictions at the start of Q4 which supported the transportation and warehousing sector in November, up 1.0% MoM, and through the end of the year. Construction continued to decline as higher interest rates affected financing. Specifically, the sector contracted -0.7% MoM in November, as a result of declines across almost all subsectors. Additionally, there was a negative contribution from the retail industry in November, down -0.6% MoM, as 8 of 12 subsectors decreased. The most notable declines were at food and beverages stores (-1.8%), building material and garden equipment and supplies dealers (-2.9%), as well as general merchandise stores (-1.6%). The Canadian economy is clearly taking hits from the sharp increase in interest rates thanks to the Bank of Canada. Because its real estate sector had been especially frothy before the rate hikes, it has seen severe economic damage that is bleeding into other sectors. Fortunately, the Bank of Canada has started to indicate that its hiking cycle is coming to a close as inflation has taken significant steps downward. But that likely won’t be enough to keep Canada from seeing one or two more week quarters before economic prospects improve, especially in housing.
France CPI
France's CPI grew 0.4% MoM to 6.0% YoY in January, up from 5.9% YoY in December. Inflation is back on the incline in France which might be less of a surprise after the upside surprise on Spanish inflation. The cause might be more artificial than anything since there was upward pressure on energy prices as a result of the end of fuel rebates. The energy subindex as a result was up 16.3% YoY, accelerating from 15.1% YoY in December. Other than fuel, there was the standard increase in food prices, up 13.2% YoY, faster than the 12.1% YoY last month. Typically increases in the more volatile categories is acceptable if there were declines in the other core segments but that wasn’t as evident. Yes, services inflation saw a -0.3 ppt decline in its annual pace (down to 2.6% YoY), but the manufactured goods inflation was broadly stable at 4.6% YoY. The ugly truth is that there are still many lingering supply chain issues that are keeping prices from falling significantly, and to add to that, consumers are still spending on services (services consumption up 0.4% QoQ in Q4 according to the GDP report). The ECB will work on the latter in its announcement later this week, but conflict in Ukraine threatens to prolong supply problems in 2023.
China CFLP Manufacturing Survey
China's CFLP Manufacturing PMI jumped 3.1 pts to 50.1 in January, the first expansion since September 2022. The Asian giant starts off the new year on a positive note. While production continued contracting at 49.8, new order growth resumed with the index up a strong 7.0 pts to 50.9. This is the strongest new order growth reported in over a year thanks to the lifting of COVID restrictions and the reopening of the economy. The employment contraction did not reverse, but it eased with the index rising 2.9 pts to 47.7. As normal operations resume, input prices look to be back on the upswing, aligning with demand. The index tracking the prices of raw materials was at a slight expansion of 52.2. Most importantly, we see the strongest optimism since May 2022 with the business production expectations index up 4.7 pts to 55.6. The non-manufacturing sector saw an even stronger rebound, up 12.8 pts to 54.4 with new orders exploding up 13.4 pts to an expansion at 52.5 and expectations up 11.2 pts to 64.9. China’s reopening is set to reverse a lot of damage that COVID policies did to the economy. The improvement in services especially is set to be a boon for growth in Q1 2023. On the other hand, as manufacturing reflates so will prices which could have an adverse effect on import prices for major trading partners with China. This all relies on the Chinese government’s willingness to tolerate COVID infections for an open economy, and in the past, it has proven to be very sensitive to major outbreaks.
Still to come…
9:00 am (EST) - US Case-Shiller Home Price Index
9:00 am - US FHFA House Price Index
9:45 am - US Chicago PMI
10:00 am - US Consumer Confidence
Morning Reading List
Other Data Releases Today
Japan's unemployment rate was unchanged at 2.5% in December. Employment grew 60k while the number of unemployed fell -20k. The labor force participation is up 0.4 ppts from a year ago to 62.3%.
Japanese industrial production edged down -0.1% MoM in January. Shipments also fell, down -0.7% MoM, leading to inventories down -0.5% MoM.
Japanese retail sales grew 1.1% MoM and 3.8% YoY in December, but wholesale sales fell -1.7% MoM. Goods sales jumped 7.1% MoM while services sales were little changed.
German retail sales (real) fell -5.3% MoM and -6.4% YoY in December. Sales grew 3.1% in the 1st half of the year and fell -4.1% in the 2nd half of the year which put full-year growth of sales at -0.6% in 2022.
German employment was unchanged in December, up 1.0% YoY. The unemployment rate edged down -0.1 ppts to 2.9% as the number of unemployed fell -11k to 1.3 million.
French PPI grew 1.1% MoM and 17.7% YoY in December, down from 18.1% YoY in November: petroleum Products were up 33.1% YoY (-13.1% MoM), food was up 19.4% YoY, transport was up 8.9% YoY, and electronics were up 6.5% YoY.
The euro area bank lending survey found substantial tightening in credit standards in Q4 2022. A net percentage of 26% of banks reported tightening standards for loans to enterprises, up from 19% in Q3 2022.
Destatis: German CPI release delayed due to technical error.
GDP
Eurozone avoids contraction but domestic demand falters (ING) - A resilient eurozone economy managed to grow by 0.1% in the fourth quarter, but this likely masks a contraction in household spending. The worst scenarios for this winter have been avoided, but the economy remains sluggish
France escapes recession, for now (ING) - French GDP grew by 0.1% in the fourth quarter, allowing the French economy to narrowly escape recession, at least for the time being. There are however few signs that the French economy will recover strongly in the coming months.
Italian GDP fell slightly at the end of 2022 (ING) - Unsurprisingly, domestic demand was the driver of this minor contraction. A short technical recession might ensue now, but a gradual recovery is expected to follow in the second quarter.
Swedish Q4 flash GDP: The downturn has begun (Nordea) - The Q4 GDP flash estimate stood at -0.6% q/q and -0.6% y/y. The outcome was weaker than expected. The Riksbank’s call for Q4 GDP was -0.8% q/q and +0.6% y/y. Our forecast was 0.0% q/q and +1.4% y/y.
Global Economy to Slow Further Amid Signs of Resilience and China Re-opening (IMF) - The global economy is poised to slow this year, before rebounding next year. Growth will remain weak by historical standards, as the fight against inflation and Russia’s war in Ukraine weigh on activity.
World Economic Outlook, Update January 2023: Inflation Peaking amid Low Growth (IMF) - Global growth is projected to fall from an estimated 3.4 percent in 2022 to 2.9 percent in 2023, then rise to 3.1 percent in 2024. The forecast for 2023 is 0.2 percentage point higher than predicted in the October 2022 World Economic Outlook (WEO) but below the historical (2000–19) average of 3.8 percent. The rise in central bank rates to fight inflation and Russia’s war in Ukraine continue to weigh on economic activity. The rapid spread of COVID-19 in China dampened growth in 2022, but the recent reopening has paved the way for a faster-than-expected recovery. Global inflation is expected to fall from 8.8 percent in 2022 to 6.6 percent in 2023 and 4.3 percent in 2024, still above pre-pandemic (2017–19) levels of about 3.5 percent.
France Inflation
Rising inflation in France adds to the ECB’s reasons to hike (ING) - While most European countries are starting to see inflation fall, the inflation peak has not yet been reached in France. In January, inflation rose again, increasing to 6% from 5.9% in December. While the economy is escaping recession for now, peak inflation is yet to come.
Germany Employment
German labour market starts the year off strongly (ING) - Only a small increase in unemployment in January shows that the labour market remains an important source of resilience in the economy.
US
Debt Limit Drama (First Trust Portfolios) - The US federal budget is on an unsustainable path…but not for the reasons that most people think. Yes, the national debt is $31 trillion, well higher than annual GDP, and only going higher. Yes, the budget deficit last year was more than a $1 trillion for the third year in a row. None of this is good.
US Weekly Economic Commentary: Don’t be fooled by Q4 GDP (S&P Global) - According to the first official "advance" estimate from the Bureau of Economic Analysis, US GDP grew at a 2.9% annual rate in the fourth quarter. The headline number was higher than expected and would seem to imply that the economy retained solid momentum through the fourth quarter of 2022. However, examination of the details, both in the composition of GDP and in the monthly profiles of key indicators, reveals that underlying demand growth is weak.
US | The yield curve has shifted further down and is headed to fully invert soon (BBVA) - The Fed is attempting to reverse this downshift saying it is set to keep policy “sufficiently restrictive for some time”. Next week, the FOMC will agree to slow rate hikes again and will discuss how much further to go.
Europe
Many European sectors will suffer from a weak economy in 2023 (ING) - In 2023, many EU sectors will see diminishing growth due to a weak economy. Manufacturing, staffing and construction are likely to face a small decline though not all sectors will shrink. While the Technology, Media & Telecom (TMT) and transport sectors should see lower growth than last year, the outlook remains positive.
Eurozone bank lending survey confirms bleak outlook for investment (ING) - The bank lending survey shows tightening credit standards and lower demand for borrowing from both households and businesses. This confirms our view of a sluggish economy for most of 2023 and is a clear sign to the ECB that rate hikes are having a substantial impact already.
Inflation
Inflation Monitor for January 30 (BMO) - Global price pressures remain elevated despite signs of meaningful cooling in North America.
Debt
Countries Should Act Now to Limit Rising Risks From Corporate Distress (IMF) - Sharp rises in global interest rates could spark corporate distress and pose wider problems for many economies
Energy
OPEC+ meeting ahead (ING) - Commodity markets will be eagerly watching what the Fed decides at its FOMC meeting this week. For oil markets, no change in output policy is expected from OPEC+ when they meet on Wednesday.
Electricity demand at turning point (ABN AMRO) - Electricity demand was flat in OECD countries in the last 10 years. The demand for electricity will expand in the coming years due to decarbonization and prioritizing energy security. In all IEA and NGFS scenarios, but particularly in the Net-Zero by 2050, electricity demand rises.
Markets
Is the 60/40 Dead? (Goldman Sachs) - The “60/40 portfolio” has long been revered as a trusty guidepost for a moderate risk investor—a 60% allocation to equities intended to provide capital appreciation and 40% to fixed income to offer yield and risk mitigation. In the period following the Global Financial Crisis, a simple mix of 60% US large cap stocks and 40% investment grade bonds would have satisfied most investors as equities marched to new highs and interest rates descended to new lows. However, the tables turned in 2022 with a 60/40 portfolio experiencing one of its worst years on record as both sides of the portfolio came under pressure.
FX
Dollar Strength: Sum of All Fears (PIMCO) - Investors typically assess the strength of the U.S. dollar (USD) through a Federal Reserve-centric lens. The dollar’s exceptional strength against a broad basket of currencies has clearly benefited from seven rate hikes last year that took the Fed’s target federal funds rate to its highest level in 15 years.
Demographics
Birth Rates, Death Rates and the World’s Population Dynamics (St Louis Fed) - The world’s population has grown from 3 billion in 1960 to 8 billion in 2022. What have been the forces behind this dramatic increase?
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