France and Canada See Little to No Growth in Q4 2022
Economic news and commentary for February 28, 2023
France GDP & CPI
France's GDP edged up 0.1% QoQ in Q4 2022 after growth of 0.2% QoQ in Q3 2022. The anemic growth showed that the economy was able to avoid a recession last year despite weak consumption in the fourth quarter. For the full-year of 2022, GDP growth was 2.6% YoY as the reopening strength that was seen in 2022 (GDP up 6.8% YoY in 2021) faded into malaise as inflation took over and financial conditions tightened. Dragging growth down was a large -1.2% QoQ decline in household consumption. The final quarter saw weaknesses in food and energy consumption, down -2.9% QoQ and -6.2% QoQ respectively, and little to no growth in goods and services spending. As a result, the savings rate increased significantly to 17.8%, an increase of 1.7 ppts. French businesses did expand in Q4 2022 but at a slow pace of 0.3% QoQ. The expansion was buoyed by a bustling service sector that offset losses in activity in the construction sector and no change in the goods sector. Outside of these categories, inventory changes and net foreign trade played their parts in pushing growth higher, contributing 0.2 ppts and 0.3 ppts, respectively. This was the largest positive contribution by net exports this year as import growth finally cooled off.
The business sector is what kept France from seeing a contraction in Q4 2022. Consumers pulled back sharply on their consumption as inflation continued to ravage their wallets. Excess savings looks to have been drawn down over the two previous quarters as consumers continued their post-pandemic spending crusades which were halted at the end of the year. The large increase in the savings rate suggests that they will be looking to refill their reserves, especially as rates improve. The downturn in business activity is likely to be next in 2023 as demand fades away. The goods sector is already seeing signs of stagnation, and the more consumers feel strongly about saving, the more the services sector will start to see signs of cracking. For these reasons, it’s reasonable to suggest that France can still enter a recession or at least see a quarter of contraction to start out 2023.
On the inflation front, early data for February were discouraging. France's CPI grew a robust 0.9% MoM to 6.2% YoY in February, up from 6.0% YoY in January. The increases in headline inflation are flowing from higher prices in food and services. Food prices were up 14.5% YoY, up from 13.3% YoY. The annual pace of food price growth has finally taken over energy price growth (14.0% YoY) as it becomes the main concern in the volatile categories thanks to a lingering war in Ukraine. The other concern is in services prices which is one that the entirety of Europe knows well. Services inflation grew from 2.6% YoY in January to 2.9% YoY in February as a strong monthly increase in transport service prices is expected. The gains in services were not offset by its counterpart category, manufacturing goods. Goods inflation advanced slightly, up 0.1 ppts to 4.6% YoY, which is a minor upside surprise since goods deflation has been the trend lately. However, Insee points out that the end-of-winter sales had a slight inflationary effect in January. The ECB has its work cut out for them, and a soft increase in French inflation will add to the pressure that the central bank has to reach its targets.
Canada GDP
Canada's real GDP growth was 0.0% QoQ in Q4 2022, after growth of 0.6% QoQ in Q3 2022. This ended a streak of five consecutively quarterly increases in GDP. Slower inventory accumulations along with declines in business investment in machinery and equipment and housing offset higher household and government spending and improved net trade. Specifically, Household consumption grew 0.5% QoQ while capital formation fell -0.7% QoQ with spending on residential structures down -2.3% QoQ and spending on non-residential structures and equipment down -1.4% MoM. The latter two categories were the weakest points of the Canadian economy. Huge inventory growth in Q2 and Q3 led to a sharp reduction in accumulation in the last quarter of the year which weighed heavily on the headline growth figure, -1.4 ppts specifically. This was mostly offset by growth in exports and a sizeable decline in imports which boosted GDP by 1.2 ppts in total. Household consumption growth was buoyed by solid disposable income growth of 3.0% QoQ in Q4 which was supported by some government benefits. As a result, the savings rate improved 1.0 ppts to 6.0%.
In general, strong incomes and low unemployment kept the Canadian consumer strong in Q4, but rising borrowing rates are keeping consumer activity growth limited. Similarly, higher interest rates are causing businesses to pull back on their spending which is creating most of the weakness in the Canadian economy. As momentum continues to fade in consumption, a contraction becomes more likely. It was really only thanks to a strong improvement in the trade deficit that Canada’s economy avoided one in Q4 2022, but it may not be so lucky in Q1 2023.
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
10:00 am - US Richmond Fed Manufacturing Survey
7:30 pm - Australia GDP
8:30 pm - China CFLP Composite PMI
Morning Reading List
Japanese industrial production fell -4.6% MoM and -2.3% YoY in January. Shipments were also down, by -3.1% MoM and -2.4% YoY. The forecast for February production sees a strong recovery of 8.0% MoM coming.
Japanese retail sales jumped 6.3% MoM and 1.9% YoY in January, and wholesale sales grew 2.0% MoM and 0.5% YoY. General merchandise (+8.9% YoY) and motor vehicles (+19.3% YoY) were strong for January. In general, goods sales were up 4.6% YoY.
Australian retail sales grew 1.9% MoM and 7.5% YoY in January. On large increases in department store sales (+8.8% MoM) and clothing sales (+6.5% MoM). Both of these categories benefitted from a weak December. Sales were also up in household goods (+1.1% MoM) and restaurants (+1.2% MoM) but at a slower pace.
French household consumption of goods grew 1.5% MoM in January after falling -1.6% MoM in December, still down -3.7% YoY. Energy goods consumption jumped 4.0% MoM, and engineered goods grew 1.3% MoM led by a 2.7% MoM increase in durable goods.
US Advance Economic Indicators for January: trade deficit up 2.0% MoM, exports up 4.2% MoM, imports up 3.4% MoM; wholesale inventories down -0.4% MoM; retail inventories up 0.3% MoM.
France Inflation
France: Inflation continues to rise while consumption rebounds slightly (ING) - French inflation has not yet peaked; it rose again in February and both headline and core inflation will probably creep higher in the coming months. Household consumption of goods rebounded in January, but this increase is partly misleading.
US Durable Goods Orders
Durable Goods Orders Lose Altitude (BMO) - Durable goods orders fell in January while core shipments flag a weak start for Q1 capital spending. ISM factory orders are in contractionary terrain while industrial production is losing steam.
New Orders for Durable Goods Declined 4.5% in January (First Trust Portfolios) - A mixed report for durable goods for January. Overall, new orders for durables fell 4.5% for the month. However, declines were concentrated among very volatile orders for commercial aircraft; strip out that single category and orders rose 0.8% in January, likely aided by unusually warm weather and a rebound from weaker activity around the 2022 holiday season.
Another Headfake from Durables Headline, Core Orders Rebound (Wells Fargo) - The drop in January durable goods was due entirely to a reversal in aircraft orders, and core capital goods orders rose by the most in five months. The durables data thus add to a string of strong economic data for January and suggest while manufacturing activity may be set to weaken further, it's not collapsing.
US
Hard Landing, Soft Landing, or No Landing (First Trust Portfolios) - The bottom line is that none of the recent reports has changed our forecast of a recession. Given the Fed’s reaction function and the decline in M2 that’s already happened, if we get more growth than expected in the near-term, that means more pain later on when the recession hits.
Do higher interest rates lead to lower investments? (Saxo Bank) - The conventional wisdom goes that higher interest rates cool the economy and investments are negatively impacted, but data on S&P 500 since 2003 suggest the opposite. When the US 10-year yield is in its fourth quartile this is actually when the subsequent one year growth rate in S&P 500 investments across research and development, and capital expenditures is the highest. Given all the talk about recession it is also worth noting that the growth in total investments among S&P 500 companies is now the highest in 11 years.
Stubborn inflation clouds the outlook (S&P Global) - Recent data revealing stronger-than-expected readings on the labor market, manufacturing production, and consumer spending continue to suggest that the US economy is not yet in recession, and that the odds of recession beginning in the first half of 2023 have receded somewhat over the last few weeks.
Finding the Will to Refill the Strategic Petroleum Reserve (Northern Trust) - Over the past two years, however, the SPR has taken a larger role in energy markets. Sales of SPR oil began by executive order in November 2021, as the reopening following the pandemic pushed up fuel prices. The reduction entered a higher gear in March 2022. Russia’s invasion of Ukraine was a systemic disruption to oil markets, prompting President Biden to order 180 million barrels to be sold from the SPR.
The Taxman Go-eth: Why the Saving Rate Jumped (Wells Fargo) - Spending grew three times as fast as income in January and yet the saving rate rose to 4.7%. How does that make sense? We explore how the answer has to do with last year’s crummy stock market results and what the BEA suspects that means for your taxes.
Europe
Spanish headline and core inflation rise again (ING) - Spanish inflation rose for the second consecutive month in February. Core inflation also continues to rise. Although we expect a decline in the coming months, this shows that underlying price pressures in the economy are still very strong.
China
The dominant Chinese electric car market is slowing (ING) - After strong electric vehicle (EV) sales in 2022, the Chinese car market is facing a setback in growth in 2023. But this doesn't mean an end to the green transition. We expect the number of zero-emission cars to surpass conventional internal combustion engine cars by 2030.
What to expect from China’s Two Sessions (ING) - China's Two Sessions annual meeting is both a political and economic event. It will set the tone on geopolitics as well as on economic targets and policy direction. Here, we examine some of the key things to watch out for at the event.
Canada
Current Account SAGs in Q4 (BMO) - Canada’s balance of payments deteriorated in Q4 as Statistics Canada reported a current account deficit of $10.6 bln ($42.6 bln a.r.), following a revised $8.4 bln shortfall ($33.7 bln a.r.) in the third quarter. After the previous quarter’s revision, this was the largest deficit in two years; we estimate the shortfall at roughly 1.5% of GDP (Q4 figures are out tomorrow).
Turkey
Turkey: fourth-quarter GDP growth driven by domestic demand (ING) - Turkish GDP in the final quarter of 2022 was driven by robust private consumption, while net exports turned out to be a drag. Growth for the whole year was strong at 5.6%, despite some momentum loss in the second half.
Russia-Ukraine War
One Year of War in Ukraine (Northern Trust) - On February 24, 2022, Russian forces rolled into Ukraine. Some forecast a brutal but short campaign; however, one year later, there is no end in sight to the conflict. The situation remains a key risk, both economically and geopolitically.
Inflation
Inflating inflation fears (Saxo Bank) - Markets have been spooked recently by higher US inflation reinforcing the higher-for-longer interest rates rhetoric. Inflation risks continue to point towards further acceleration despite the easing of supply chain disruptions, mostly driven by services cost pressures underpinned by high wages. China’s reopening and the no-landing narrative will also bring fears of an additional inflationary impulse, along with structural issues of deglobalization and energy crunch.
Inflation Monitor for February 27 (BMO) - The Federal Reserve’s preferred inflation measures unexpectedly accelerated in January while consumer spending reignited after a year-end slump. As such, we have revised up our U.S. inflation forecasts across the board for this year. Core PCE prices are now expected to climb 4.2% in 2023 (3.8% previously), and core CPI prices up 4.6% (4.5% previously).
Credible and Incredible Disinflations (Jim Bullard, St Louis Fed) - St. Louis Fed President Jim Bullard talked about “credible” versus “incredible” disinflations during a panel discussion at “The Credibility of Government Policies: Conference in Honor of Guillermo Calvo” at Columbia University.
Central Banks
Central Bank Portfolios Are Underwater (Northern Trust) - Central banks around the world have been raising short-term interest rates aggressively for almost a full year now. All of the tightening has, however, put central banks into a kind of hole.
Data Alters Market's Expectations for Peak Policy Rate But Not Outlook for Fed Cuts (PIMCO) -Surprisingly strong recent readings for U.S. employment and inflation have been notable for causing markets to rethink the path of U.S. Federal Reserve policy in some ways but not others.
Real Estate
Apartment Absorption Rate Falls but Remains above 60% (NAHB) - Data from the Census Bureau’s latest Survey of Market Absorptions of New Multifamily Units (SOMA) indicates that the multifamily market continues to have high demand with apartment completions reaching their highest level since the third quarter of 2021. The absorption rate of new condominiums reached 82.0%, the best rate since the third quarter of 2013.
FX
Dollar weakening delayed (CIBC) - The USD could be supported in the near-term by resilience in the economy and continued Fed hikes, and although we may add a hike to our existing forecast, we still expect the Fed to undershoot the market's hiking expectations, weighing on the USD into mid-year, as attention turns to other advanced economies that are raising interest rates.
Research
In Major Economic Shocks, Best Response Combines All-Out, Large-Scale Policies (IMF) - During the pandemic, countries often used all-out responses that combined large fiscal, monetary, and prudential policies like grants, credit facilities, and relaxed capital requirements. As we demonstrate in a new working paper, this kind of expansive response may be needed to support corporate borrowing and credit growth in major future crises that combine global supply and demand shocks.
The Shifting Expectations for Work from Home (Kansas City Fed) - The COVID-19 pandemic shifted expectations of work from home for both employees and employers. Prior to the pandemic, only about 15 percent of workers over the course of a year performed any full workdays from home. The early stages of the pandemic led a much higher percentage of workers—nearly 40 percent—to work from home when businesses shifted toward remote work to slow the spread of the virus.
State-Dependent Local Projections: Understanding Impulse Response Heterogeneity (San Francisco Fed) - An impulse response is the dynamic average effect of an intervention across horizons. We use the well-known Kitagawa-Blinder-Oaxaca decomposition to explore a response’s heterogeneity over time and over states of the economy. This can be implemented with a simple extension to the usual local projection specification that nevertheless keeps the model linear in parameters.
The Role of Immigration in U.S. Labor Market Tightness (San Francisco Fed) - Immigrants contribute a large portion of the growth in the U.S. population and labor force. However, immigration flows into the United States slowed significantly following immigration policy changes from 2017 to 2020 and the onset of the COVID-19 pandemic. Analysis of state-level data shows that this migration slowdown tightened local labor markets modestly, raising the ratio of job vacancies to unemployed workers 5.5 percentage points between 2017 and 2021. More recent data show immigration has rebounded strongly, helping to close the shortfall in foreign-born labor and ease tight labor markets.
How Equitable Wealth Outcomes Could Create a Resilient and Larger Economy (St Louis Fed) - Wealth, or net worth, is instrumental in advancing the financial stability of households and communities. For example, wealth serves as a form of self-insurance against life’s unexpected setbacks. It also allows people to make important investments, such as paying for college, purchasing a home or starting a small business. These investments, in turn, can help fuel economic growth.
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