German GDP Contracts in Q4 Despite Improvement in Sentiment
Economic news and commentary for January 30, 2023
Germany GDP
German GDP fell -0.2% QoQ in Q4 2022, its first contraction since Q1 2021. The decline that had been expected for much of the year finally came despite some cooling in inflation that occurred at the end of the year. Indeed, high prices finally had a significant impact on German consumers as they reduced their spending in the final quarter of the year. Destatis reported that the main factor driving GDP growth lower was this contraction in consumption. However, German industry likely didn’t help much as evidenced by the weak PMIs that were reported earlier in the month. Despite the quarterly contraction, GDP was still up 1.1% YoY (after adjustments). Also, Destatis reported that the price-adjusted GDP rose by 1.8% in 2022. Economic growth was 1.9% after adjustment for price and calendar effects. This means there was a downward revision of the original result by 0.1 percentage points. The outlook for the next quarter has not improved much. Consumer sentiment measures (ZEW, GfK) have increased from their lows, but they are still below long-term averages. Stickier inflation in core areas is still a problem that will prompt further action by the ECB (including later this week). This will continue to tighten German credit and limit the ability for consumers and businesses to expand. The risks are tilted to the downside, and there is a real possibility we could see two quarterly contractions (a “recession”).
Euro Area Economic Sentiment
The euro area's Economic Sentiment Indicator (ESI) grew 2.8 pts to 99.9, and the Employment Expectations Indicator (EEI) grew 2.7 pts to 110.1. This puts the ESI just -0.1 below the long-term average as pessimism finally tames to late 2021, early 2022 levels. The improvement in sentiment was strongest in France (+4.4 pts) but was also evident in the other large European economies, Spain (+2.7 pts), Germany (+2.5 pts), and Italy (+1.7 pts). Across industries, the boost was also broad-based across industries. The industry confidence and services confidence subindexes gained at similar magnitudes, 1.7 pts and 1.6 pts respectively, and the consumer confidence subindex gained 1.4 pts. However, consumer sentiment is still well below the long-term average of -11.4 at -20.9 as inflation is still having a major negative impact on housholds’ financial situations. There is some hope that this will improve in the next three months as the industry selling price expectations index fell a steep -5.9 pts to 31.9 (the long-term average is 7.8). On the other hand, there was a slight uptick in the services selling price expectations index, up 1 pt to 29.8, thanks to a more upbeat outlook. This will be a concern that the ECB takes into its consideration later this week as it decides how to rule on rate hikes.
Still to come…
10:30 am (EST) - US Dallas Fed Manufacturing Survey
6:30 pm - Japan Unemployment Rate
6:50 pm - Japan Industrial Production
6:50 pm - Japan Retail Sales
7:30 pm - Australian Retail Sales
8:30 pm - China CFLP Manufacturing PMI
Morning Reading List
Other Data Releases Today
Italy's PPI grew 2.9% MoM and 31.7% YoY in Dec. Prices in the domestic market grew 3.8% MoM while foreign market prices grew just 0.4% MoM. Construction prices fell -0.1% MoM but were up 7.6% YoY.
Personal Income & Outlays
Back-to-Back Declines in Real PCE Mean a Tough Start to 2023 (Wells Fargo) - The 2.1% real PCE growth reported in yesterday's GDP report masked some underlying details which were revealed in today's personal income and spending report. The upshot is that consumer spending did more than lose momentum, it actually declined in the final two months of the year.
U.S. Personal Spending: Bad Santa (BMO) - Hammered by higher prices and borrowing costs, and feeling less wealthy, U.S. households are cutting back, and will likely contribute to a contraction in Q1 GDP. The good news is that they are also pushing back against price hikes, which will help the Fed tackle inflation and limit further rate hikes.
US consumers lose momentum as inflation undershoots Fed’s predictions (ING) - Consumer spending slowed sharply through the fourth quarter and we will need to see a rapid turnaround to prevent a contraction in the first quarter of this year. Meanwhile, the Fed's favoured measure of inflation is already undershooting the Fed's forecasts from last month, adding to a sense that the peak is close for interest rates.
Income Decelerates and Spending Declines (TD Bank) - While yesterday's Q4 advance GDP report had already telegraphed pointed to some softness in household consumption, the monthly figures showed a much weaker handoff heading into 2023. This suggests Q1 consumption could very easily stall or perhaps print negative, which would be a faster adjustment in spending relative to what we had previously assumed in our December Quarterly forecast.
December Personal Income and Consumption (First Trust Portfolios) - Personal income rose 0.2% in December, matching consensus expectations. Personal consumption declined 0.2% in December (-0.5% including revisions to prior months), also matching consensus expectations. Personal income is up 4.6% in the past year, while spending has increased 7.4%.
Personal Income Rises 0.2% in December (NAHB) - Real disposable income, income remaining after adjusted for taxes and inflation, inched up 0.2% in December. However, on a year-over-year basis, real (inflation adjusted) disposable income has experienced almost 2 years of negative growth following March 2021.
Germany GDP
German economy falls into winter recession (ING) - So much for reliable statistics! The German economy contracted in the fourth quarter of 2022 after the first tentative statistics pointed to stagnation.
Euro Area Sentiment
Eurozone sentiment continues to improve (ING) - Economic sentiment in the eurozone increased to 99.9 in January, the third consecutive increase. Service sector businesses were particularly upbeat, resulting in stubbornly high selling price expectations. The latter will be taken as hawkish input for the ECB meeting
ECB
ECB cheat sheet: Wake up, this isn’t the Fed! (ING) - A 50bp hike by the European Central Bank, and a repeat of its December guidance, are set in stone but a pushback against subsequent cut expectations will move 5Y euro rates higher.
BoE and the ECB: More of the Same. Sort Of. (BMO) - The BoE and ECB announcements on February 2 may, once again, be a study of contrasts. Recall their last meetings: both central banks announced a 50 bp hike on December 15, but that’s where the similarities ended.
Upbeat PMIs paint two-sided risks for the central banks (Danske Bank) - The January Flash PMIs painted a somewhat less negative growth outlook, reflecting lower energy prices and generally easing financial conditions. Both manufacturing and services indices recovered in the euro area, bringing the composite index above 50 for the first time since last June, and pointing towards recovering activity
Bank of England
Bank of England: Preview Topside risk to EUR/GBP (Danske Bank) - We expect the Bank of England (BoE) to hike the Bank Rate by 50bp. We pencil in an additional 25bp hike in March, now expecting the Policy Rate to peak at 4.25% in March 2023. Dovish communication from BoE should send EUR/GBP higher during the day.
Bank of Canada
The case of contradicting conditions (CIBC) - Which economic indicators will the Bank of Canada be looking at to decide whether to hike again? The short answer is “all of them”. But financial market participants will inevitably have to come up with a more nuanced answer if they want to understand Governor Macklem’s playbook, because it’s almost inevitable that economic data will send conflicting signals about growth and inflation in the coming months. Barring the unlikely cases of a deep economic crash or an outright boom, that’s what we always see.
US
GDP: Grossly Distorted Picture (BMO) - The primary theme in financial markets so far in 2023 is a rising hope of a coveted soft landing for the advanced economies. Firming equities, narrowing credit spreads, fading bond yields and a softer U.S. dollar are all part of the package associated with inflation receding without the messy business of an outright recession.
U.S. Economy: Still Afloat (BMO) - Fundamentally, our forecast hasn’t changed much: we still foresee a downturn that raises the unemployment rate to 5%—the bitter medicine required to treat inflation. However, lingering pockets of resilience increase our confidence that the slump will be mild and short-lived.
Will the US Fed step down its rate hike trajectory again? (Saxo Bank) - Despite some improvement in the growth narrative recently, the Fed has limited new trends of the US economy to take note of at their January 31-February 1 meeting. The recovery in Q4 GDP comes with a weakening consumer spending, and incoming data remains volatile at best. This means there is reason to believe that the Fed will want to lengthen its tightening cycle, and go in smaller steps, in order to buy more time to assess the growth and inflation dynamics.
Inflation
Are Inflation Targets Still On Point? (Northern Trust) - This question vexes central banks around the world. Most have adopted inflation targets, and in developed markets, almost all of them center around 2%. But the post-pandemic period has initiated scrutiny of this figure. Should it ever change, and what circumstances would justify an adjustment? These questions hover like a large shadow over today’s monetary policy.
The Fed Is Focused On Service Prices (Northern Trust) - One area where inflation continues to concern central bankers is services. Output in developed economies is dominated by services; in the United States, for example, they account for well over 70% of gross domestic product (GDP). The key ingredient in the provision of services is labor, which has been in short supply. In these areas, rising wages could continue to pressure prices.
Debt Ceiling
America’s Debt Limit Drama (BMO) - The U.S. reached its $31.38 trillion debt limit on January 19. The debt limit places a statutory maximum on the amount of money that Treasury may borrow to fund federal operations (often referred to as the “debt ceiling”).
Garvey: No deal on the debt ceiling will have disastrous consequences (ING) - Pressure is mounting - again - on the US Congress to come to an agreement on raising the debt ceiling. With the risk of a deeper recession and a technical default looming if there's no deal, the stakes are especially high this time around
Energy
Drastic shift in natural gas outlook (ING) - European gas prices have collapsed over the Northern Hemisphere winter. Mild weather and weak industrial demand have ensured that gas storage has remained strong. The region should get through this winter comfortably and prospects also look better for the 23/24 winter. While we have cut our forecasts, significant risks to the upside remain.
Brent crude stumbles ahead of $90 as focus turns to fuels (Saxo Bank) - Crude oil trades near unchanged on the month after spending most of that time recovering from an early January selloff. In the short-term resistance in the $90 area in Brent is likely to remain firm with recession risks offsetting an expected rebound in Chinese demand and supply concerns related to the February 5 introduction of an EU embargo on Russian seaborne sales of fuel products. We maintain a patient but bullish outlook for crude oil driven by strength in the product market.
Europe Has Dodged An Energy Crisis (Northern Trust) - Hope is not a strategy. Europeans can vouch for this maxim: after Russia cut off most energy supplies last summer amid the war and sanctions, there were fears that the region would run out of gas this winter. Those concerns have largely faded.
Real Estate
Buyers Expect Less Housing Availability (NAHB) - After a brief respite earlier in 2022, buyers’ expectations of housing availability soured again at the end of the year. In the final quarter of 2022, the share of buyers who expect the home search to get easier in the months ahead dropped to 24%, down from 37% in the third quarter. In contrast, 66% expect the search to get harder/stay the same, up from 59%.
Markets
Cutting rates or cutting corners? (Nordea) - Market pricing of rate cuts looks quite aggressive, even if peak rates have not been maintained for particularly long in history either. We think central banks will have to keep rates at a high level for longer than the markets are pricing in.
Outlook
10 Macro Themes for 2023 (Guggenheim) - Guggenheim Investments’ Macroeconomic and Investment Research Group identifies 10 macroeconomic trends likely to shape monetary policy and investment performance this year.
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