Intesa Sanpaolo : Next week’s most important macroeconomic indicator is the November employment report in the United States, which could see a moderate re-acceleration in payrolls (yet, this would be linked to a transitory effect ie the end of strikes in the auto sector).
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Weekly Economic Monitor – 1. December 2023
Intesa Sanpaolo – Research Department
In the Eurozone, November’s industrial production data should not change the picture of weak economic activity. Finally, the Eurogroup is scheduled to attempt a last- minute agreement on the reform of fiscal rules ahead of the EU Council in mid-December.
Eurozone. The most important news of this week was the faster-than-expected drop in inflation in November. Consumer prices in the Eurozone fell by half a point in the month, decelerating year- on-year from 2.9% to 2.4%, a low since July 2021; more importantly, CPI excluding energy and fresh food (-0.4% m/m) slowed more than we expected, from 5% to 4.2% y/y, the lowest pace since April 2022; services prices fell by as much as -0.9% m/m, decelerating in annual terms to 4% from 4.6% previously (in this case, this is a low since August last year). In other words, the slowdown in energy dynamics is finally being transferred to the core components, and in particular to services.
In Italy, inflation also fell more than expected in November, even dropping below 1% (to the lowest since early 2021). The further decline (on the domestic index) was due to the prices of goods, which reached negative territory on an annual basis (-1.3%), pushed down once again by energy (-24.5% y/y). A contribution to the slowdown in inflation also came from the m/m drop in prices of some types of services (recreational, cultural, personal care and transport). On the other hand, services as a whole, as well as food, although decelerating on a year-on-year basis, maintained high rates (3.7% and 6.1%, respectively). The underlying component (on the NIC) stood at 3.6% from 4.2% previously; inflation on the so-called ’shopping basket‘ (grocery and unprocessed food), and that on frequently bought products, are at even higher rates (5.8% and 4.8% y/y, respectively).
As a result of the recent lower-than-expected data, we have revised down our inflation forecasts for the 2024 annual average by three tenths both for the euro area, to 2.3% from a previous 2.6%, and for Italy, to 1.9% from 2.2% (on the domestic index). For the Eurozone, inflation in our scenario would fall marginally below 2% only in August-September, before rising a few tenths above this threshold in the last months of 2024. If the fall in inflation proves much faster than the latest ECB staff’s projections, the conditions for a cut in ECB rates could mature before September 2024; however, many uncertainties remain – particularly on energy prices.
On the cycle front, the November round of confidence surveys was completed this week with the release of the Istat indices in Italy and ESI for the Eurozone. On average, the indications were less negative than in the previous month: the improvement was led by the most forward-looking components, on the expectation that the cycle of rate hikes is over. The low point of the cycle in industry may be behind us, and consumer sentiment seems to be beginning to benefit from the decline in inflation; however, surveys on the business side show that signs of a slowdown are intensifying both in construction, which does not yet seem to have felt the full effect of past rate hikes, and in services, which have exhausted the boost from extra savings and the post- pandemic normalisation of lifestyles.
Even one of the main supporting factors of the economic scenario, i.e. the resilience of the labour market, is showing some creaking: the unemployment rate in the Eurozone as a whole remained stable at 6.5% in October, but in Germany and Italy we are beginning to see an increase in the number of unemployed, and the hiring intentions of companies in the Eurozone too, although not showing a contraction in the workforce for the time being, are becoming less and less expansionary.
Overall, November’s surveys are consistent with Eurozone GDP in the range of zero to -0.1% q/q at the turn of the year; the risks on this estimate remain downward. Given that there are no signs of a turnaround, and the new year will likely start with substantial stagnation, it is likely that annual growth 2024 in both the Eurozone and Italy will not show a significant acceleration compared to 2023 (expected to close at 0.4% in the euro area and 0.7% in Italy, respectively).
Next week’s calendar of economic data releases in the Eurozone will be decidedly lighter: industrial production data in the area’s major countries should not change the picture of weak economic activity by much, although surveys indicated that the bottom of the cycle for industry may have been reached; the final Eurozone GDP estimate for Q3 could see a downward revision
of a tenth, to -0.2% q/q.
Italy has received the green light from the Commission on the NRRP revision, and an agreement has been reached with the EU to release the fourth instalment of EUR 16.5 billion by the end of the year, which would bring the total received so far by Italy to around EUR 102 billion, or more than half of the total amount of the plan. The revision reshapes several conditions, and consequently the expected amount of the instalments, to the downside for 2024, in exchange for a greater thickening of the conditions required, and of the tranches to be received, in the final part of the plan (in particular in 2026). The reshaping of targets (not only on investments but also on reforms), the abandonment of projects that are more difficult to implement, and the shifting of resources from direct Government interventions to contributions to private investments, could in perspective reduce the delays accumulated so far. The impact on Italian GDP growth of the NGEU funds is estimated by the Government, on the basis of the 2023 National Reform Programme (which only partially incorporates implementation delays), at 0.9% in 2024, 1.1% in 2025 and 0.5% in 2026 (in other words, in the two-year period 2024-25, more than three quarters
of GDP growth is due to the effects of the NRRP). According to the statement a few days ago by the State Accountant General Mazzotta, 42 billion have been spent so far (much less than in the initial forecasts), of which as much as 26 billion are attributable to ‚automatic‘ tax credits such as Superbonus and Transition 4.0. A significant acceleration of expenditure flows in 2024 seems necessary for even an incomplete realisation of the plan. An important issue for Italy is also the negotiation on the reform of EU fiscal rules, which could return to the table of the Eurogroup scheduled for 7 December.
United States. The most important data on the calendar next week is the November employment report. We expect a re-acceleration in payrolls, as the October slowdown was partly due to strikes in the auto sector (which weighed in at almost 30k payrolls). However, the increase is expected to be moderate: jobless claims, although rising slightly in early November, remain at levels below the Summer average, but hiring intentions from the October PMI survey also fell into recessionary territory in services, for the first time since June 2020. The unemployment rate is expected to remain stable at 3.9% (a tenth above the FOMC’s September expectations for Q4).
The information that arrived this week showed, in addition to an upward revision of the Q3 GDP figure (from 4.9% to 5.2% q/q ann.), due to investment and public spending (while consumption growth is less vigorous than in the first estimate), a slowdown in both personal spending (due to the decline in purchases of goods and in particular new cars) and income in October (at 0.2% m/m in both cases, well below the average for the first 9 months of the year), and a rebound in consumer confidence (Conference Board), due however mainly to the most volatile components, a sign that consumption growth between the end of 2023 and the beginning of 2024 will slow down but should remain positive. The data on new home sales and pending home sales in October (-5.6 % and -1.5 % m/m, respectively) confirmed the indications of a contraction in the housing market.
The PCE deflator in October fell to its lowest since March 2021 on the headline index (3% y/y) and since June 2021 on the core index (3.5% y/y), with signs of a slowdown affecting food, transport and housing, recreation and financial services. This is two-tenths less than the 3.7% pace indicated by the FOMC in its September Summary of Economic Projections for the current quarter.
Overall, signs are emerging of only a moderate slowdown in the economy (from a pace of more than 5% q/q ann. in the Summer, to around 2% in the current quarter), in a context of a gradual cooling of inflationary pressures that seems to us to be in line with the central bank’s expectations, and not faster than anticipated as in the Eurozone. In November’s Beige Book, the Fed noted that economic activity, consumption and price growth had slowed in recent weeks, and that the process of rebalancing the labour market was slowly continuing.
In summary, compared to the central bank’s September expectations, GDP growth in the last quarter of the year will most likely be higher than the 2.1% assumed (our estimate: 2.5%), while the unemployment rate could be one to two tenths higher and the PCE deflator (both headline and core) should be lower (by about half a point) than expected by the FOMC. This is a development with mixed implications (more growth, but also higher unemployment and less inflation), still not such as to lead the Fed to cut rates in the next 3-6 months in our view.
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