Intesa Sanpaolo : With the cut on 6 June, the ECB embarked on a phase of monetary easing that is expected to be very cautious.
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Weekly Economic Monitor – 07. June 2024
Intesa Sanpaolo – Research Department
The European Parliament election will not lead to radical changes in the Union’s strategic directions. In the US, the FOMC will leave rates unchanged next week, revise up inflation projections and signal fewer rate cuts in 2024 than in March. Global PMIs show a reacceleration of manufacturing activity still driven by emerging countries.
Euro area. The ECB, as widely anticipated, cut official rates by 25bp, bringing the deposit rate to 3.75%. The staff’s new macroeconomic projections show a not negligible upward revision of inflation estimates in 2024-25, which also involves core measures, indicating greater domestic price pressures than the ones foreseen in March. The revision of the inflation outlook, as well as the absence of any guidance on the next steps, which will remain data dependent, confirm the ECB’s very cautious approach, which has no intention to lock in a particular path for rates just yet.
In short, the outcome of the meeting and the subsequent press conference offered no surprises.
We confirm our forecast that there will be two more cuts by the end of the year, probably at the September and December meetings provided that data has shown further progress in core inflation in the meantime.
The European elections are not expected to lead to radical changes in either the EU’s political set-up or in the Union’s strategic directions. Compared to the previous term, we should see an increase in the weight of right-wing parties, while Liberals and Greens would experience the greatest loss of votes. The centrist group, made up of Populars, Socialists and Liberals, although losing some consensus, is nevertheless expected to retain a majority in the hemicycle (according to the most recent polls they should obtain about 390 seats out of a total of 720). Von der Leyen’s re-election as president of the Commission is likely but should not be taken for granted. She will have to be re-elected by a qualified majority of the national leaders on 27-28 June and then pass a secret ballot in parliament, probably in September after the summer break. According to the polls, a majority would theoretically be guaranteed, but given the dissatisfaction, even within the EPP itself, about her previous mandate, she could require external support either from the Greens or from the more pragmatic areas of the right-wing groups, such as ECR. Looking ahead, in the next five years we should not see any substantial changes in the fiscal approach towards member states after the just approved reform of the Stability Pact, while efforts towards the ecological transition might be eased. Defence, trade policies and strengthening European competitiveness will also remain key issues in the run-up to the US election, which could open up new scenarios for global trade.
The week just ended saw the publication of the first industrial production data for April, which showed increases in France (0.5% m/m from -0.2%; +0.9% y/y) and Spain (0.3% m/m from -0.7%; +0.8% y/y) after declining in the previous month. On the contrary, industrial output decreased for the second month in Germany (-0.1% m/m from -0.4%), which was, however, affected by the contraction in construction against a mild growth in manufacturing. For now, demand for goods remains weak, but surveys are providing signs of stabilisation for the sector, with the most leading components suggesting that the restart of the inventory cycle could return to support production starting in the coming quarters.
In the Eurozone aggregate, retail sales fell in April (-0.5% m/m from +0.7%; stagnating year-on-year), leaving goods purchases on course for a slight decline in the current quarter. The figure, although affected by the early timing of the Easter, shows that recent gains in household purchasing power have not yet been passed on to private spending, suggesting that the consumption recovery must wait until the second half of the year. The PPI fell for the sixth month (-1% m/m from -0.5%; -5.7% y/y). However, the decline was entirely due to energy, net of which producer prices rose for the fourth month (0.2% m/m from 0.3%; -1% y/y), consistent with non-energy industrial goods inflation still negative but stabilising in the coming months.
The final readings of the May PMI indices confirmed the outperformance of the Spanish economy, where the composite PMI improved for the sixth month (56.6 from 55.7) to a peak since March last year, with signs of accelerating activity in both manufacturing (54 from 52.2) and services (56.9 from 56.2). In Italy, on the other hand, surveys disappointed expectations with unexpected declines for the second consecutive month for both industry (45.6 from 47.3) and services (54.2 from 54.3), leaving the composite indicator nonetheless at expansionary levels (52.3 from 52.6) and slightly higher than those recorded on average in Q1. Italian surveys have been rather volatile in recent months, but overall, the latest readings would seem to confirm our forecast of a temporary slowdown in GDP in the current quarter.
The final GDP estimate confirmed that the Eurozone expanded by 0.3% q/q (0.4% y/y) in Q1. The upward revision (from -0.1% q/q to zero) of last year’s Q3 figure pushes up the 2023 annual average to 0.6% and due to a more favourable overhang, implies, ceteris paribus, a 0.1pp increase to 0.7% of our full-year forecast for 2024. In Q1 GDP deflator decelerated to 3.6% y/y from 5.1%, a low since the end of 2021: there is a marked downsize of the contribution of profits, almost nil, while the contribution of unit labour costs, which now explain about ¾ of price growth, stabilised at rather elevated levels.
Finally, next week’s macroeconomic calendar looks rather sparse:
– Data for Italy and the Eurozone as a whole will close April’s round of industrial production readings. In Italy, after a particularly disappointing Q1, output could rebound by 0.6% m/m from a previous -0.5%. However, surveys do not show any particular signs of a reacceleration in the short term and activity is expected to have remained weak in the current quarter as well (the delays related to the publication of the implementation decrees for the Transition 5.0 plan should have contributed to curb the production of capital goods). In the Eurozone, we expect industrial output to shrink by at least -0.7% m/m assuming a rather marked fall of the highly volatile Irish figure (due on Monday). Excluding Ireland, we expect an increase of around 0.3% m/m;
– The final readings of the May consumer price indices in Germany, France and Spain are not expected to show revisions but will be useful to analyse the components breakdown after the upward surprises in the core measures and the reacceleration of services inflation that emerged from the flash estimates. Some factors, such as the base effect related to public transport discounts in Germany last year, the reduction in medical deductibles in France as well as the effects of previous increases in goods prices on insurance rates, may have contributed, but the details of the indices will be needed to assess whether even the components most sensitive to labour costs have shown signs of overheating (the German Länder data seem consistent with a substantial stabilisation).
United States. The most important event next week is the FOMC meeting on 12 June. We do not expect any changes to official rates but, compared to the May meeting, we expect more accommodative tones on the back of the latest data on inflation, growth and the labour market, which have provided signs of moderation. Powell should however remain cautious and signal the possibility of waiting a few more months before starting to cut rates, pending further confirmation of easing inflation. On the other hand, as far as the official forecasts are concerned, the median of opinions on the future path of participants‘ rates contained in the “dots plot” could shift upwards, consistently with two cuts in 2024 instead of the three foreseen in March. In the wake of stronger-than-expected inflation data at the beginning of the year, inflation projections could also be revised upwards by one or two tenths for the deflators in the current year, while confirming convergence to 2% at the end of the forecast horizon. On the contrary, GDP growth could be revised downwards by a tenth to 2% at the end of the year, while the unemployment rate forecast could rise by a tenth to 4.1%.
As for next week’s macroeconomic data, the focus will remain on consumer and producer price data:
– The May CPI report will be released a few hours before the outcome of the FOMC meeting and is expected to show a slowdown in consumer price growth to 0.1% m/m from 0.3% m/m in April. If confirmed, this would be the smallest increase since October last year and would leave headline inflation unchanged at 3.4% y/y. Core price growth, excluding food and energy, is on the contrary expected to remain stable at 0.3% m/m (which would still mark a slowdown from the 0.4% m/m average recorded in Q1). Core inflation is expected to fall by a tenth to 3.5% y/y;
– PPI is seen rising by a modest 0.1% m/m, slowing from 0.5% m/m in the previous month (by 0.3% m/m from 0.5% m/m for the core index). Import prices are also expected to slow to 0.1% m/m from 0.9% m/m previously;
– Finally, the week will end with the University of Michigan’s June consumer confidence index expected to rise to 73 after the large drop to 69.1 recorded in the previous month.
The week just ended showed mixed signals with confidence surveys showing an ongoing divergence between the manufacturing and service sectors. The ISM manufacturing index disappointed expectations, coming in at 48.7 in May from a previous 49.5. The reading confirms the contraction in the sector, which has been ongoing for several months now, while the slowdown in orders does not yet seem to offer any signs of reversal in the short term. In contrast, the ISM services rose more than expected from 49.4 to 53.8, consistent with domestic demand continuing to show signs of resilience. On the hard data front, factory orders growth stabilised at 0.7% m/m in April, while construction spending fell for the fourth month (-0.1% m/m from -0.2%). In April, the trade deficit widened by USD 6Bn to USD 74.6Bn, the widest since October 2022, due to imports growing at a faster pace than exports for months: the figure is consistent with a negative contribution of net foreign trade to GDP growth in Q2 as well. Finally, vehicle sales in May were better than expected also due to manufacturers‘ incentives, reaching 15.9 million units compared to the 15.8 million expected.
April’s personal spending and income data were consistent with a deceleration in the pace of growth of private consumption in Q2, while the core deflator grew slightly less than expected, but the annual downtrend is still tentative. The core PCE rose 0.249% m/m from 0.334% and 2.754% y/y from 2.813%, while the headline deflator rose 0.257% m/m from 0.338% and 2.655% y/y from 2.703%. Disposable income rose by 0.2% m/m but fell by -0.1% m/m in real terms. With the savings rate unchanged at 3.6%, real spending fell -0.1% m/m, with the modest increase in services spending failing to offset the slowdown in goods.
Finally, we report that global manufacturing PMIs showed a further pick-up in manufacturing activity, still driven by emerging countries (China first and foremost) but now also supported by signs of stabilisation in advanced countries. The global manufacturing index jumped from 51.4 to 52.6. The growth in new orders (51.0) was associated with a slightly stronger dynamic also in final prices (51.8) and a new increase in freight prices to and from China.
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