German ZEW index adds to recent growth worries

The third drop in a row for the German ZEW index marks a turning point for the worse as any growth optimism from the start of the year evaporates

All bad things come in threes. The ZEW index, which measures financial analysts’ assessment and expectations of economic and financial developments, signals a turn of the German economy for the worse. In May, the ZEW index decreased to -10.7 from 4.1 in April, the third consecutive drop. At the same time, the current assessment component also weakened, dropping to -34.8 from -32.5 in April.

Weak German macro data in recent weeks, as well as the US debt ceiling debate, banking turmoil and expectations of further rate hikes, seem to have dented analysts’ optimism.

Earlier optimism has disappeared for now

The ZEW index is definitely one of the worst-performing leading indicators in Germany when it comes to predicting GDP growth. However, it has a decent track record in predicting turning points in the economy. With this in mind, today’s ZEW sends a worrisome message: three consecutive drops are a new trend, a trend in the wrong direction.

To some extent, today’s index numbers are both backward and forward-looking. It’s both a reflection of recent weak macro data but also, once again, of a downscaling of growth expectations. The optimism at the start of the year seems to have given way to more of a sense of reality. A drop in purchasing power, thinned-out industrial order books as well as the impact of the most aggressive monetary policy tightening in decades, and the expected slowdown of the US economy all argue in favour of weak economic activity. On top of these cyclical factors, the ongoing war in Ukraine, demographic change and the current energy transition will structurally weigh on the German economy in the coming years.

All of this doesn’t mean that the German economy will be stuck in recession for the next couple of years. But it does mean that growth will remain subdued at best and that the flirtation with stagnation will continue.

source: ing

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Eurozone flags

Eurozone economy grew marginally in the first quarter of 2023, but divergence is high

The eurozone economy carries on along the rim of stagnation. A meagre 0.1% quarter-on-quarter GDP growth in the first quarter with high divergence across member states is better than feared –  but clearly no reason to cheer.

The eurozone economy grew by a meagre 0.1 % quarter-on-quarter in the first quarter of the year, from zero in the fourth quarter of 2022. On the year, GDP growth came in at 1.3%. Growth across the eurozone ranged from -2.7% QoQ in Ireland to +1.6% QoQ in Portugal. A homogenous monetary union looks differently.

Resilence and divergence

More resilient than expected is clearly one label to put on the eurozone’s economic performance. In fact, the eurozone economy has now been able to avoid what a few months ago was probably the best predicted recession ever. The warmer winter weather, lower wholesale energy prices, the reopening of China and fiscal stimulus are the key drivers behind this better-than-expected performance.

However, there is no reason for complacency. First of all, the growth performance is anything but homogenous. While the largest eurozone economy, Germany, remains in recessionary territory, France and Spain today slightly surprised to the upside. Growth in the eurozone ranged from -2.7% QoQ in Ireland to +1.6% QoQ in Portugal. A divergence, which doesn’t make the ECB’s task any easier. To some extent, this divergence could simply be the result of different time lags for fiscal stimulus and energy price caps. More structurally, however, this divergence could also be the start of a more structural rebalancing of the eurozone economy as Germany’s economic business model is clearly the most affected by higher energy prices, energy transition, and global trade tensions.

Looking ahead, a short-lived industrial renaissance and the gradual impact of recent wage increases could actually lead to a further acceleration of eurozone growth – at least in the short run. In fact, it will again be a race between two opposing drivers: the positive momentum in industry and wage increases against the impact of monetary policy tightening and a looming US recession. In true European tradition, neither of the two will win. The compromise for the eurozone economy will be subdued growth going into 2024.

source: ing

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eurozone and Germany

German Ifo improves marginally in April

An improving Ifo index is always good news. However, a weaker current assessment component and below-average expectations do little to take away the stagnation risk for this year

In April, Germany’s most prominent leading indicator, the Ifo index, increased for the seventh month in a row, coming in at 93.6 from 93.2 in March. Expectations improved again but remain below their historical average, while the current assessment component weakened somewhat. This combination nicely illustrates that lower wholesale gas prices and the reopening of the Chinese economy have boosted economic confidence but that the German economy is still far away from strong growth.

Saved from recession – for now

Available hard data for the first two months of the year as well as recent soft indicators point to a surprising growth revival in the German economy. This growth revival is driven by a rebound in industrial activity, helped by the Chinese reopening and an easing of supply chain frictions. But this rebound is also very likely a short-lived one. At the same time, private consumption continues to suffer from still-high retail energy prices. Recent wage settlements, like last weekend’s agreement in the public sector, will offset the loss in purchasing power but only partly and only gradually.

Looking beyond the first quarter and particularly looking into the second half of the year, the German economy will continue its flirtation with recession. This is when the backlog will have been reduced without new strong demand coming in, when the impact of the most aggressive monetary policy tightening in decades will fully unfold and when a slowdown of the US economy will hit German exports. On top of these cyclical factors, the ongoing war in Ukraine, ongoing demographic change and an ongoing energy transition will structurally weigh on the German economy in the coming years.

With seven monthly increases in a row, today’s Ifo index is another illustration of the German economy’s better-than-expected resilience. The drop in wholesale energy prices and the reopening of China have even fuelled a short-lived industrial renaissance. Chances are even high that the first estimate for first quarter GDP growth (to be released on Friday) will show a positive growth figure. However, we expect this rebound to run out of steam soon. The flirtation with stagnation will continue.

source: ING


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Eurozone EUR

Eurozone retail sales decrease again in February despite upbeat surveys

Retail sales in February continued to decline, which makes it unlikely for a positive contribution to first quarter GDP. This suggests that there may be weakness in the economy and no strong rebound in growth is expected.

Retail trade volume down by 0.8% in the euro area and by 0.9% in the EU

Retail sales volume has declined since peaking above pre-pandemic levels and has fallen to levels well below. The decline accelerated in 2022 and there is no break from the trend yet. The spike in the value of retail sales last year due to inflation has now plateaued.

Sales figures for February were disappointing in all five major markets, with Germany and France experiencing the biggest drops of -1.3% and -1.5% respectively. This suggests that consumers are still struggling with high inflation and an uncertain economic future, despite a slight improvement in confidence levels. Although there has been a slight uplift in consumer sentiment, it remains at levels typically associated with an economic recession.

Although surveys such as PMI and Ifo showed a positive outlook for the economy in the first quarter, there has been no concrete evidence from actual sales data to support this. Unless there is a significant increase in March, retail sales are likely to decrease in the first quarter. However, it is important to note that retail sales may not accurately reflect the state of the economy as services have been performing well and there is a potential for increased production activity. Despite this, the current retail sales figures do not suggest a strong economic recovery.

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German industrial orders surged in February

Industrial orders have now rebounded sharply since November, brightening the outlook for German industry. However, the US slowdown and the longer-term fallout from recent financial turmoil, as well as the broader impact of monetary policy tightening, could still spoil the party

German industrial orders surged in February, brightening the outlook for German industry. Industrial orders increased by 4.8% month-on-month, from 0.5% MoM in January. On the year, orders are still down by almost 6%. After the sharp fall since last summer, industrial orders have recovered in recent months. Compared with November last year, industrial orders have increased by more than 7%.

These strong industrial orders data fuel recent optimism in German industry. Interestingly, production expectations had just started to weaken again after the initial enthusiasm over the Chinese reopening at the start of the year. Looking ahead, the outlook for German industry has clearly brightened, even if the high inventory build-up since last summer is still likely to weigh on production in the short run. Beyond the short term, however, the question will be whether today’s boost in new orders is the start of an industrial revival or whether the expected slowdown of the US economy, the fallout from recent financial market turmoil and the broader impact of monetary policy tightening will spoil the party again.

source: ING

Europ, EUR

Europ plans to make it easier for mid-market banks to lose liquidity

Europ plans to make it easier for mid-market banks to lose liquidity

Liquidity reduction is an approach that can be used for orderly withdrawal from trading activities and to prevent risks to financial stability, and the lack of this credible plan can jeopardize the validity and feasibility of the resolution strategy of any bank that has significant trading books.

France: Inflation falls, but not by much, and consumption drops

Inflation decreased in France in March, thanks to base effects on energy prices. Nevertheless, underlying inflationary pressures remain very high and food inflation will continue to rise. GDP growth will therefore likely remain weak, as confirmed by the falling consumer consumption in February

Inflation falls, thanks to energy

As expected, headline inflation in France fell in March to 5.6% from 6.3% in February. The harmonised index, which is important for the European Central Bank, stands at 6.6% against 7.3% last month. This fall in inflation is mainly due to the base effects of energy prices, which rose in March last year when the war in Ukraine started. Energy inflation thus stood at 4.9% in March compared to 14.1% in February. Given the tariff ‘shield,’ which limited the increase in gas and electricity prices in France to 4% in 2022 and 15% in 2023, energy continued to contribute positively to French inflation, unlike in other European countries which saw energy bills fall in 2023 after the very sharp rise in 2022.

In addition, the government’s decision to raise tobacco prices pushed these prices up by 7.8% year-on-year in March (compared to +0.2% in February). Food inflation also continues to rise, by 15.8% year-on-year in March, compared to 14.8% in February. Food is now by far the largest contributor to inflation in France. At the same time, inflation in manufactured goods rose from 4.7% to 4.8%.

Despite the fall in headline inflation, underlying inflationary pressures remain very high. Consumer prices rose by 0.8% over one month in March, which is well above historical averages. The only positive element is the slight drop in services inflation, from 3% to 2.9% in March, due in particular to the fall in transport services prices, which indicates that the increases in the minimum wage have not led to a sharp rise in the prices of all services, so far. Transport also benefits from lower fuel prices.

What is the outlook for inflation?

In the coming months, food inflation is expected to remain the largest contributor to consumer price inflation in France. Despite the fall in world food commodity prices, food inflation will probably continue to rise in the short run. Indeed, the cost increases of recent months will continue to be reflected in food prices, as evidenced by the recent trade negotiations, which will lead to an increase in prices paid by supermarkets to their suppliers of around 10%. However, the impact of these negotiations is not expected to be immediate on prices but gradual during the second quarter of 2023.

Producer prices remain dynamic in industry, rising by 13% year-on-year in February compared to 14.5% in January, but are decelerating. This implies that inflationary pressures for manufactured goods will start to ease in the coming months. In addition, survey data for March indicates that fewer firms are expecting higher prices. Although price expectations remain historically high, they have started to decline in all sectors. Assuming that energy prices remain lower than in 2022, headline inflation is expected to average 5% in 2023 (5.9% for the harmonised index), with a marked decline from the end of the summer. Nevertheless, inflation should end the year above 3%.

Consumption declines

This expected decline in inflation is taking place against a background of slowing global demand, and growth, expected in France in 2023. The data on household consumption of goods for the month of February, published this morning by INSEE, confirms this once again. Consumer spending fell by 0.8% in volume over the month, following a 1.7% rise in January – a rise that was truncated by statistical effects linked to the disappearance of the energy voucher. Consumption is down in all product categories, and the drop is particularly strong in food (-1.2% over the month). Though services consumption probably held up better, household consumption will probably not be a strong driver of economic growth in the first quarter. We expect quarterly growth to be 0.1%, and the risks are tilted to the downside, particularly in view of the social unrest in March, which may have had a temporary negative impact on activity. Growth is not expected to be much more dynamic for the rest of the year, with activity hampered by rising interest rates, slow global growth, and the inflationary environment. We expect GDP growth to be weak at 0.7% for 2023 as a whole, and 0.7% in 2024 (down from 2.6% in 2022).

source: ING

Eurozone inflation is expected to decrease

Inflation is expected to fall sharply in March due to lower energy prices, according to preliminary estimate data from Germany’s six economic states on Wednesday.

The inflation rate in the state of Brandenburg and Baden-Württemberg fell to 7.8 percent year-on-year. Also, in Bavaria, Hesse, and North-Rhine Westphalia, the inflation rate decreased to 7.2, 7.1, and 6.9 percent, respectively, and in the eastern state of Saxony, the inflation rate decreased to 8.3 percent. In February, the inflation rate in these six states was between 8.3 percent and 9.2 percent. According to economists at ING, inflation in Germany and the eurozone is no longer the result of a supply shock, but a demand-side issue. Economists of this financial institution said that not only the price of energy and primary goods are passed on to consumers, but also the increase in profit margins in some companies has also added to the inflationary pressures. Given the developing growth-price and wage-price spirals in Germany, core inflation will remain stubbornly high.

The European Central Bank will continue to raise interest rates, at least through the summer, before entering a long period of higher interest rates. Labor forces are increasing their demands and wages and gaining bargaining power in a very tight labor market. Germany’s public sector wage talks failed to reach an agreement this week, although employers offered wage growth of roughly 6 percent a year for 2023 and 2024. Unions are in a stronger position, so we continue to assume that final wage growth will be higher than forecasts, said Christian Schulz, an economist at Citigroup Investment Bank. This directly increases inflation; Because local authorities have to increase administrative costs and health insurers donate higher contribution rates to pay for higher costs. While headline inflation is easing, core inflation is expected to remain elevated.

German inflation

German inflation drops but there’s no sign of broader downward trends

German headline inflation dropped in March to the lowest level since last summer. However, there are still no signs of any broader disinflationary trend outside energy and commodity prices

Has the disinflationary process started? We don’t think so. German March headline inflation came in at 7.4% Year-on-Year, from 8.7% YoY in February. The HICP measure came in at 7.8% YoY, from 9.3% in February. The sharp drop in headline inflation is mainly the result of negative base effects from energy prices, which surged in March last year when the war in Ukraine started. Underlying inflationary pressures, however, remain high and the fact that the month-on-month change in headline inflation was clearly above historical averages for March, there are no reasons to cheer. 

No signs of broader disinflationary process, yet

Today’s sharp drop in headline inflation will support all those who have always been advocating that the inflation surge in the entire eurozone is mainly a long but transitory energy price shock. If you believe this argument, today’s drop in headline inflation is the start of a longer disinflationary trend. As much as we sympathised with this view one or two years ago, inflation has, in the meantime, also become a demand-side issue, which has spread across the entire economy. The pass-through of higher input prices, though cooling in recent months, is still in full swing. Widening profit margins and wage increases are also fueling underlying inflationary pressure, not only in Germany but in the entire eurozone.

Available German regional components suggest that core inflation remains high. While energy price inflation continued to come down and was even negative for heating oil and fuel, food price inflation continued to increase. Inflation in most other components remained broadly unchanged. Given that energy consumption is more sensitive to price changes than food consumption, it currently makes more sense for the European Central Bank to only look at headline inflation that excludes energy but includes food prices when assessing underlying inflationary pressure.

All this means is that just looking at the headline number is currently misleading; there are still few if any signs of any disinflationary process outside of energy and commodity prices.

Headline inflation to come down further but core will remain high

Looking ahead, let’s not forget that inflation data in Germany and many other European countries this year will be surrounded by more statistical noise than usual, making it harder for the ECB to take this data at face value. Government intervention and interference, whether that’s temporary or permanent or has taken place this year or last, will blur the picture. In Germany, for example, the Bundesbank estimated that energy price caps and cheap public transportation tickets will lower average German inflation by 1.5 percentage points this year. And there is more. Negative base effects from last year’s energy relief package for the summer months should automatically push up headline inflation between June and August.

Beyond that statistical noise, the German and European inflation outlook is highly affected by two opposing drivers. Lower-than-expected energy prices due to the warm winter weather could are likely to push down headline inflation faster than recent forecasts suggest. On the other hand, there is still significant pipeline pressure stemming from energy and commodity inflation pass-through and increasingly widening corporate profit margins and higher wages.

Even if the pass-through slows down, core inflation will remain stubbornly high this year.

ECB has entered final phase of tightening

As long as the current banking crisis remains contained, the ECB will stick to the widely communicated distinction between using interest rates in the fight against inflation and liquidity measures plus other tools to tackle any financial instability. The fact that there are still no signs of any disinflationary process, discounting energy and commodity prices, as well as the fact that inflation has increasingly become demand-driven, will keep the ECB in tightening mode.

The turmoil of the last few weeks has been a clear reminder for the ECB that hiking interest rates, and particularly the most aggressive tightening cycle since the start of monetary union, comes at a cost. In fact, with any further rate hike, the risk that something breaks increases. This is why we expect the ECB to tread more carefully in the coming months. In fact, the ECB has probably already entered the final phase of its tightening cycle. It’s a phase that will be characterised by a genuine meeting-by-meeting approach and a slowdown in the pace, size and number of any further rate hikes.

We’re sticking to our view that the ECB will hike twice more – by 25bp each before the summer – and then move to a longer wait-and-see stance.

source: ING

German Eurozone

German Ifo continues upward trend

Another improvement in sentiment in the German economy as the Ifo index increased for the sixth month in a row in March. However, we fear that the latest financial turmoil will reach the real economy in the coming months.

In March, Germany’s most prominent leading indicator, the Ifo index, increased for the sixth month in a row, coming in at 93.3 from 91.1 in February. Lower wholesale gas prices and the reopening of the Chinese economy have boosted economic confidence. Both the current assessment and expectations component increased significantly.

Divergence between financial markets and real economy

The financial market turmoil of the last few weeks has not yet affected economic sentiment – at least not economic sentiment measured by company surveys. The latest economic sentiment indicators nicely illustrate that for now, financial market turmoil appears to be ringfenced and has not affected the real economy: while the ZEW index, filled in by financial analysts, dropped, PMIs and now the Ifo index increased. We are more careful, however, and remind everyone that the Ifo index can react with a delay of one to two months to unexpected events and financial market turmoil can clearly affect the real economy over time.

The German economy will continue its flirtation with recession. But what is more important: the ongoing war in Ukraine, ongoing structural changes, an ongoing energy transition and the impact of the most aggressive monetary policy tightening in decades are the main drivers of what looks like subdued growth for a longer while.

source: ING

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