Macroeconomic house view – September 2023

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Global outlook

Due to restrictive monetary policy and ongoing high inflation, the global economy remains on a downturn. Even if there is a further slowdown in growth in the final quarter of the year, there is no sign of imminent recession. The situation in the labour markets remains tight. The number of job vacancies continues to decline and the rate of unemployment is slowly increasing. While consumer confidence seems to have stabilised at a low level, expectations for future economic activity remain weak.

Having come down considerably in the first half of the year, headline inflation is starting to climb again, one reason being the base effect and another being the rising real wages and strong fiscal support. In addition, serious doubt is being cast on disinflation and the growth narrative by the significant rise in oil prices. Central banks in developed economies will keep interest rates high for longer; we cannot expect any interest rate cuts in the next few quarters.

“While consumer confidence seems to have stabilised at a low level,
expectations for future economic activity remain weak.”

Michael Blümke

U.S.

U.S. GDP growth remained solid in September despite the revisions downwards made in previous months. U.S. growth again exceeded that of other developed economies in the third quarter. Tight monetary policy and the restrictive lending conditions will curb growth in the next few quarters, yet the prospects of a soft landing are good considering the current growth and inflation data. In particular, the strong fiscal support, the good state of household incomes and the stable labour market are supportive factors. The leading indicators of these components provide confirmation: the expansion of the services sector is slowing while manufacturing has improved slightly despite a falloff in activity. In September, a decline in consumer confidence was reported for the second time. However, since consumers are still spending their savings, retail sales remain buoyant.

The labour market is cooling down in an orderly fashion: supply and demand are coming into balance and growth in wages is slowing. Disinflation is not at an end yet. Following the latest rise in energy prices, headline inflation accelerated in August to +3.7% year on year. The Fed made tangible progress towards reducing inflation. However, while it paused hikes in September it did mention the need for further interest rate hikes if another pickup in demand threatens disinflation.

Eurozone

The rapid slowdown in growth, stubborn inflation and an oil price of almost USD 100 per barrel is reigniting fears of stagflation in the eurozone. Both the EU Commission and the ECB have revised their GDP growth forecast downwards and their inflation forecast upwards for 2023 and 2024. Second-quarter GDP data in the eurozone were up only 0.1% quarter-on-quarter, which is much lower than original estimates. The main reason for this low GDP growth is the much weaker export figures, which reflect the weak industry order intake. Performance in Germany and Italy was particularly poor. European consumer confidence has stabilised thanks to the improvement in real wages, but remains low. Despite the record-low unemployment rate, household spending is declining. Owing to a further deterioration in the economic climate and the fact that purchasing managers’ indices are stuck in contractionary territory, growth expectations for the third quarter are around 0%. High interest rates and stricter lending conditions are stunting growth. In September, the ECB raised its deposit rate to 4% but still faces major challenges, what with core inflation still being far too high (4.5%, having fallen by 0.8% over the course of the month), real wages increasing and the economy flagging.

China

Many economic experts have recently lowered China’s GDP growth estimate for 2023 to below the official target of 5%. An upturn still proved elusive in September but the Chinese authorities continue to support the economy with targeted fiscal and monetary policies. The PBoC has repeatedly cut key rates and the reserve requirement ratio. In addition, measures to restore confidence, to promote investment and consumer spending and to support the beleaguered real estate sector were stepped up. Political incentives are starting to have an impact but it will take some time for a sustainable recovery to take place. On the positive side, domestic demand, industrial production and retail sales have increased.

The negatives include ongoing difficulties in the real estate sector (including the potential for contagion risk), weak international demand and ongoing trade tensions. While consumer prices were slightly positive year-on-year (+0.1%), producer prices remained in negative territory (-3%).