Intesa Sanpaolo : The downward trend in annual inflation continues in both the Eurozone (CPI at 2.6% from 2.8% in February, ECB core CPI at 3.3% from 3.6%) and the US (core PCE deflator at 2.8% from 2.9% in January).
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Weekly Economic Monitor – 01. March 2024
Intesa Sanpaolo – Research Department
At this stage, there seem to be fewer obstacles to the disinflationary process in the euro area than in the US: in this sense, next week the ECB is expected to announce a downward revision of both GDP and HICP staff projections, paving the way for a rate cut at one of its next two meetings (more likely in June than in April).
Eurozone.
Next week, the most important event is the ECB Governing Council meeting on Thursday 7, from which no news on rates is expected. The staff’s new forecasts should include downward adjustments to the growth and inflation projections; the communication could reiterate that monetary policy will be decided on a meeting-by-meeting basis and remains “data dependent”, without providing clear official guidance this time either. It cannot be ruled out that the conclusion of the work on the revision of the monetary policy framework could already be announced at this meeting, although there are no official announcements of an advance on the ‘Spring’ deadline. We believe that the start of the rate-cutting phase is now imminent, but it is likely that considerations relating to the containment of reputational risks will lead to the first move being postponed until June, continuing with the ‘data-dependent’ approach.
Meanwhile, preliminary consumer price data for February, released this week, confirmed the slowdown in Eurozone inflation, roughly in line with expectations, to 2.6% in February from a previous 2.8%. Yet the core index fell less than anticipated (the measure excluding energy and fresh food to 3.3% from 3.6%), mainly due to resilient services (3.9% from 4% y/y). Inflation declined in all major countries (from 3.1% to 2.7% in Germany, from 3.4% to 3.1% in France, from 3.5% to 2.9% in Spain), with the only (expected) exception being Italy, where there the HICP was unchanged at 0.9% y/y.
The confidence indices published this week (ESI EU Commission Eurozone, ISTAT in Italy) showed more negative signals compared to the first part of the February survey round, highlighting renewed weakness not only in industry but also in services, retail trade and construction (while the recovery in household morale, albeit slow, continues).
The labour market, while remaining robust, is starting to show some signs of weakening: in Germany, the unemployed rose by 11,000 in February, for a jobless rate at 5.9% (the highest since May 2021); in France, payrolls in Q4 remained unchanged (and fell by a tenth in the private sector). In Italy, the unemployment rate remained at 7.2% in January (the lowest since 2008), but only because of an increase in inactivity (the number of people in work fell by 34,000). In the euro area as a whole, unemployment fell by a tenth to 6.4%, but the previous month’s figure was revised upwards by a tenth.
In Italy, annual data showed a higher-than-expected unadjusted GDP growth in 2023 of 0.9% in volume terms (from 4% previously, revised upwards from 3.7%) and 6.2% in market prices (from 7.7% in 2022, revised upwards from 6.8% previously). However, despite better-than-expected GDP data (both in current and chained prices), the PA deficit was 7.2% of GDP, much higher than in the NADEF forecast (which remained at 5.3%), due to an even higher-than-expected take-up of construction bonuses. The consolidation of the Superbonus figures, as well as the reclassification of the Transition 4.0 package tax credits as payable, has also led to an upward revision in net borrowing for 2022 (8.6% of GDP, compared with a previous estimate of 8%). However, the upward revision in the level of nominal GDP (by more than 16 bn in 2022) resulted in a much lower debt/GDP ratio than previously estimated, from 140.5% in 2022 (revised downwards from 141.7%) to 137.3% in 2023 (compared to 140.2% projected in the NADEF). However, maintaining the downward trajectory will be much more difficult from this year onwards, due to a much less favourable gap between nominal GDP growth and the cost of debt, as well as the possibility of a still sustained take-up of the still existing tax bonuses.
The coming week is rather light in terms of data releases: the most relevant will be the January industrial production numbers in Germany, France and Spain, which will reflect heightened volatility in the two months at the turn of the year. In the area’s largest economy, we see a partial rebound (0.6% m/m) after the -1.6% m/m drop in December: the end-of-month rail strike, although it lasted less than anticipated, also involved goods trains, but motorway traffic figures seem to suggest that the impact was offset, at least in part, by road transport; construction may also have benefited from more favourable weather conditions than in previous months. However, German industrial activity is likely to remain sluggish in the coming months, given the persistent weakness of foreign demand: factory orders are expected to fall again in January, by as much as -6% m/m, after December’s large jump was explained exclusively by major orders in aeronautics. In France, industrial output should correct by -0.9% m/m after December’s robust increase (+1.1% m/m) was supported by an unusual seasonal pattern expected to reverse. In Spain, the rebound in the auto sector may have supported industrial production (+0.5% m/m from -0.3% previously).
Eurozone-wide data for January should show little change in PPI (-0.1% m/m, -7.9% y/y) after the large drop seen in December (-0.8% m/m), and retail sales falling for the third month in a row (our estimate: -0.3% from -1.1% m/m), after both Germany and France reported declines this week. Finally, the latest surveys for February, Italy’s and Spain’s services PMIs, should confirm a more favourable picture compared to Germany and France, with indices still at expansionary levels and improving on the previous month (to 52.6 from 51.2 in Italy and to 52.8 from 52.1 in Spain).
United States.
Next week, the focus will be on the February employment report, scheduled for Friday 8 March: we expect non-farm payrolls to moderate in February, at around 180k (from 353k in January). The unemployment rate could stay stable at 3.7%. A marginal increase is expected in the participation rate (to 62.6%) and in weekly working hours (to 34.2, after a drop due to bad weather in January). Finally, monthly growth in hourly wages is expected to cool to 0.2% m/m from 0.6% m/m previously.
The other relevant data of the week will be the ISM of the services sector (on Tuesday, 5th), expected to slow down to 53 in February, from 53.4 the previous month: it will be important to verify the dynamics of hiring intentions (which, after the “anomalous” collapse in December, had “normalised” in January), as well as that of prices paid, which in January had reached a high for almost a year (at 64). Also on Tuesday, the data on factory orders will be released, which are expected to fall by about two percentage points in January after rising 0.2% m/m in December. Finally, the trade deficit is expected to narrow slightly in January, to USD 61.7 billion from USD 62.2 billion in December.
On the cyclical front, there are indications of consumption losing some momentum: real personal spending in January fell by -0.1% m/m, and is now on course (if stable in February and March) for national accounts consumption growth of around 1.5% q/q ann. in the current quarter (about half the pace seen in the previous two quarters). The surprise drop in consumer confidence according to the Conference Board in February (to 106.7 from 110.9) does not suggest any indication of reacceleration, nor does the stagnation in real household disposable income in January, even in a context of accelerating nominal income (1% m/m) and a rebound in the savings rate (3.8%, after falling to 3.7% the previous month).
But the most relevant information of the week just passed concerns the personal consumption deflator, which in January showed an acceleration in line with what could be expected after the upward surprises on CPI and PPI, to 0.3% m/m (0.4% core) after 0.1% in December. However, both the headline and core deflators continued to slow year-on-year, to 2.4% from 2.6% and to 2.8% from 2.9% respectively, in both cases to almost three-year lows.
In our view, the latest economic information remains consistent with a first Fed cut in June and cumulative cuts of 75 basis points this year (at this stage, indeed, risks are currently shifting towards cuts of a smaller magnitude than this baseline scenario).
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