After three years of pandemic shutdowns, reopening booms, war, clogged supply chains and nascent inflation, European policymakers thought that 2023 would be the year the old continent returned to a new normal of decent growth and sub-2% inflation. Europe’s economy is indeed settling down. Unfortunately, though, the new normal is considerably uglier than economists had expected.
Start with the positives. The euro zone has proved remarkably resilient, considering the shock of Russia’s invasion of Ukraine and the energy crisis. Gas is now cheaper than it was on the eve of the conflict, after prices spiked last summer. Governments were not forced to ration energy as had been feared at first, in part thanks to unseasonably warm weather. Headline inflation, having reached a record 10.6% in October, is falling.
Nor, as doom-mongers predicted, has industry collapsed because of the cost of fuel. In Germany, energy-intensive factories have seen output drop by a fifth since the war started, as imports replaced domestic production. But production overall had fallen just 3% by the end of the year, in line with the pre-pandemic trend. The latest ifo survey shows manufacturers as optimistic as they were before covid-19.
Although Germany’s economy shrank slightly in the fourth quarter of 2022, the euro zone defied expectations of recession. According to the European Commission’s latest forecast, the bloc will avoid a contraction this quarter, too. Recent sentiment surveys support this projection. The widely watched purchasing-managers’ index (pmi) has risen in recent months, suggesting a rosier picture is emerging in manufacturing and, especially, services.
Economic stability keeps people in jobs. The number in work across the bloc rose again in the fourth quarter of 2022. The unemployment rate is at its lowest since the euro came into existence in 1999; in surveys, firms indicate appetite for new workers. And jobs keep people spending. Despite high energy prices, consumption contributed half a percentage point to quarterly growth in the second and third quarters of 2022. In many countries, “the energy shock takes time to affect consumers because high prices are only passed on with a lag,” says Jens Eisenschmidt of Morgan Stanley, a bank. “In the meantime, financial help from governments has helped households spend.”
The question now is how long they will keep spending. Households began to tighten their purse strings in the fourth quarter of 2022. In Austria and Spain, for which detailed gdp figures are available, consumption dragged down quarterly growth by a percentage point. Retail trade in the euro zone fell by 2.7% in December, compared with the month before. State handouts and price caps will be withdrawn this year. Consumption could become a problem.
Meanwhile, inflation is proving stubborn. “In the eu we have 27 different ways in which wholesale energy prices are passed on to consumers, which is a nightmare to forecast,” sighs a commission official. Some price pressure may still be on the way—as looks to be the case in Germany, where energy prices in January rose by 8.3% from December. Even if wholesale prices stabilise at current lower levels, household prices may prove erratic.
Europe’s strong jobs market could add to inflation. High prices and labour shortages, which are likely to worsen as oldies retire and fewer youngsters enter the workforce, are pushing up pay demands. In the Netherlands wages jumped by 4.8% in January, compared with a year earlier, after increasing by just 3.3% in 2022 and 2.1% in 2021. Germany’s public-sector unions are threatening more strikes. They want a whopping 10.5% raise, which could set the tone for comrades elsewhere.
Data from Indeed, a hiring website, show that wages in the euro zone tend to follow underlying, or “core”, inflation. This shows no sign of softening. The consumer-price index, excluding food and energy, rose by 7% in the year to January. Services, in particular, face steeply rising costs, according to the pmi survey, which may lead to further price increases.
This leaves the European Central Bank with little choice but to keep interest rates high. Markets expect them to rise from 2.5% to to 3.7% in the summer. Funding for firms and households is thus set to get more expensive, hitting investment. Credit standards are already tightening, according to the bank’s lending survey. And most of the impact of monetary tightening, Mr Eisenschmidt argues, is yet to be felt.
The euro zone may have escaped recession so far, but its prospects—stubborn core inflation, high interest rates and a weak economy—are hardly pleasant. The imf predicts 0.7% growth in 2023; the commission forecasts 0.9%. Even this might be optimistic. America faces equally stubborn inflation, and China’s reopening has not provided much of a boost to the bloc. Welcome to the grim new normal. ■
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OTTAWA — Economic growth resumed in January and came in better than first expected following a small contraction in December, Statistics Canada said Friday.
Real gross domestic product rose 0.5 per cent to start the year, the agency said, beating its initial estimate for a gain of 0.3 per cent for the month and reversing a contraction of 0.1 per cent in the final month of 2022.
Statistics Canada also said its initial estimate for February indicates growth continued with a gain of 0.3 per cent, though it cautioned the figure will be updated.
“There were many indications that the economy got off to a solid start in 2023, but today’s double-barrelled blast of strength is well above even the most optimistic views,” BMO chief economist Douglas Porter wrote in a report.
“Even if growth stalls in March, it now looks like Q1 will post growth of 2.5 per cent, up from a flat read in Q4. While we continue to look for a notable cooldown in the next two quarters, we are bumping up our GDP growth estimate for all of 2023 by three ticks to 1.0 per cent.”
The growth in January came as goods-producing industries gained 0.4 per cent for the month, while services-producing industries rose 0.6 per cent.
Statistics Canada said many of the main drivers for growth in January also contributed the most to the decline in December.
The wholesale trade, transportation and warehousing, and mining, quarrying and oil and gas extraction sectors all rebounded after falling in the previous month.
Wholesale trade gained 1.8 per cent in January, helped by wholesalers of machinery, equipment and supplies, while the mining, quarrying and oil and gas extraction sector grew 1.1 per cent after falling 3.3 per cent in December.
The transportation and warehousing sector added 1.9 per cent in January, more than offsetting a drop of 1.1 per cent in December that was due in part to bad weather.
This report by The Canadian Press was first published March 31, 2023.
Canada’s economy kept growing at the start of this year, defying expectations of a stall and eventual technical recession in the face of the highest interest rates in 15 years.
Preliminary data suggest gross domestic product expanded 0.3 per cent in February, Statistics Canada reported Friday in Ottawa, led higher by oil and gas, manufacturing, and finance and insurance sectors. That followed a 0.5 per cent expansion in the previous month, stronger than expectations for 0.4 per cent growth in a Bloomberg survey.
The Canadian economy is now on track to expand at an annualized rate of 2.8 per cent in the first quarter, assuming growth in March comes in flat. That’s much more robust than the 0.5 per cent annualized pace forecast by the Bank of Canada in January, when it signaled a conditional rate pause.
“Today’s double-barreled blast of strength is well above even the most optimistic views,” Bank of Montreal Chief Economist Doug Porter said in a report to investors. “Suffice it to say that if the strength seen in the opening months of the year persists, the BoC is going to find itself in a tough spot.”
Canada’s currency reclaimed nearly all of its losses after the release and bonds rallied. The yield on benchmark government two-year debt fell more than 3 basis points to 3.777 per cent at 9:50 a.m. in Ottawa.
The data suggest while some rate-sensitive sectors like housing have already cooled, overall economic growth is still holding up better than expected. It’s also at odds with a flurry of early estimates released last week that suggested a pullback in economic activity, with retail, wholesale and manufacturing sales all falling in February.
Friday’s numbers will test Governor Tiff Macklem and his officials as they look for evidence that monetary policy is sufficiently restrictive to bring inflation back to the central bank’s 2 per cent target. An accumulation of stronger-than-expected data may prompt them to stay on the sidelines for longer or even hike again.
Traders in overnight swaps markets, however, are betting the Bank of Canada’s next move will be a cut, given turmoil in global financial markets after the failure of regional U.S. lenders and a government brokered takeover of a European banking giant.
Economists in a monthly Bloomberg survey see 1 per cent annualized growth in the first three months of this year. But that’s expected to be followed by two straight quarterly contractions.
During deliberations for the central bank’s March 8 decision to hold rates steady for the first time in nine meetings, policymakers said they saw “clear signals” hikes so far were curbing demand. But there are few signs in recent data that the economy is gearing down.
Both goods-producing and services-producing industries were up in January, with nearly all sectors posting increases, except agriculture, utilities and management of companies.
Rebounds in several industries drove the January gain. Many of the key growth drivers were the largest contributors to December’s 0.1 per cent decline, including wholesale, transportation, and oil and gas industries. Accommodation and food services activity was also a key contributor.
“The Bank of Canada is likely at a crucial juncture and facing a significant dilemma,” Charles St-Arnaud, chief economist at Credit Union Central Alberta Ltd., said in a report to investors. “The central bank may have to choose between fighting inflation and hiking interest rates again or focusing on financial stability and keeping rates on hold.”
LONDON, March 31 (Reuters) – Britain’s economy avoided a recession as it grew in the final months of 2022, according to official data which showed a boost to households’ finances from state energy bill subsidies but falling investment by businesses.
With the economy still hobbled by high inflation and worries about a weak growth outlook, gross domestic product (GDP) increased by 0.1% between October and December after a preliminary estimate of no growth.
GDP in the third quarter was also revised to show a 0.1% contraction, a smaller fall than initially thought, the Office for National Statistics (ONS) said on Friday.
Two consecutive quarters of contraction would have represented a recession.
Despite the improvement, British economic output remained 0.6% below its level of late 2019, the only G7 economy not to have recovered from the COVID-19 pandemic.
“The latest release takes the UK a little further away from the recessionary danger zone although the report does not change the overall picture that the economy’s performance was lacklustre over the second half of 2022 as the cost of living crisis hit hard,” Investec economist Philip Shaw said.
The International Monetary Fund forecast in January that Britain would be the only Group of Seven major advanced economy to shrink in 2023, in large part because of an inflation rate that remains above 10%.
Since then, a string of economic data has come in stronger than expected by analysts.
Ruth Gregory at Capital Economics said Friday’s figures showed high inflation had taken a slightly smaller toll than previously thought.
“But with around two-thirds of the drag on real activity from higher rates yet to be felt, we still think the economy will slip into a recession this year,” she said.
House prices slid in March at the fastest annual rate since the financial crisis, mortgage lender Nationwide said.
The Bank of England (BoE) last week raised interest rates for the 11th consecutive meeting and investors are split on the possibility of another increase in May.
Britain’s dominant services sector rose by 0.1%, boosted by a nearly 11% jump for travel agents, echoing other data which has pointed to a surge in demand for holidays.
Manufacturing grew by 0.5%, driven by the often erratic pharmaceutical sector, and construction grew by 1.3%.
Individuals’ savings were boosted by the government’s energy bill support scheme and households’ disposable income increased by 1.3% after four consecutive quarters of negative growth.
The BoE expects Britain’s economy to have contracted by 0.1% in the first three months of 2023 but it forecasts slight growth in the second quarter.
The outlook has improved thanks in large part to falling international energy prices and a strong jobs market.
But the picture could darken again if recent turmoil in the global banking sector leads to lenders reining in loans.
BUSINESS INVESTMENT FALLS
The data suggested businesses remained cautious. Business investment fell 0.2% in quarterly terms, a sharp downgrade from a first estimate of a 4.8% rise after changes to the way the ONS calculates seasonal adjustments.
Finance minister Jeremy Hunt this month announced new tax incentives to encourage companies to invest, although they were less generous than a previous scheme and came just as corporate tax is due to jump.
The ONS said Britain posted a shortfall in its current account in the fourth quarter of 2.5 billion pounds ($3.1 billion), or 0.4% of GDP.
Excluding volatile swings in precious metals, the shortfall fell to 3.3% of GDP from 4.2% in the third quarter.
The ONS said increased foreign earnings by companies, particularly in the energy sector, helped narrow the deficit.
Britain’s financial account surplus – which shows how the current account deficit was funded – comprised large net inflows of short-term, “hot” money. Foreign direct investment was negative in net terms for a sixth quarter running.
($1 = 0.8073 pounds)
Additional reporting by William James, graphic by Vineet Sachdev; Editing by Robert Birsel and Catherine Evans