Major Economies See Slower Growth, Slowing but Still High Inflation
Among the most notable news on global growth this week was the latest data from China. The official manufacturing and service sector PMIs both rose more than expected in February, a development that has prompted us to upgrade our forecast for Chinese economic growth, as we discuss in more detail in the Topic of the Week.
Elsewhere, however, this week's news largely consisted of slower growth late in 2022 for many of the major developed economies. Canada's Q4 GDP was a significant downside surprise, with the flat quarterly outcome below the consensus forecast for moderate growth during the quarter. The details were only modestly better—consumer spending rose at a 2.0% quarter-over-quarter annualized pace but business investment fell at a 5.3% pace, contributing to overall final domestic demand growing at a moderate 1.0% pace. The report also revealed a 3.0% quarter-over-quarter (not annualized) increase in household disposable income; although with that increase reflecting higher government benefits and some one-off transfers, it is perhaps not as favorable as it might appear at first glance. Finally, with respect to the monthly contours of economic growth, December GDP fell 0.1% month-over-month, though Statistics Canada's early estimate is that January GDP rose 0.3%. Overall, we see nothing in these figures that would suggest a resumption in policy rate hikes from the Bank of Canada.
Australia's economic growth at the end of 2022 was also a modest downside surprise. Australia's Q4 GDP rose 0.5% quarter-over-quarter, below the consensus forecast for a 0.8% increase. Consumer spending rose moderately by 0.3%, while private investment fell 1.7%, contributing to a flat quarterly outcome for final domestic demand. Given the improving outlook for China's economy, we believe the soft patch for Australian growth will prove temporary. Thus even with Australia's January CPI also slowing to 7.4% year-over-year, we fully expect the Reserve Bank of Australia to again raise its policy interest rate at its monetary policy meeting next week.
The theme of softer-than-expected growth was also prominent in Europe. Switzerland's Q4 GDP was unchanged for the quarter, slightly below the 0.1% quarter-over-quarter gain forecast by the consensus. Consumer spending and investment spending both rose in the quarter but were offset by a fall in exports. Swiss indicators for early 2023 are mixed, with the February KOF leading indicator rising to 100.0, but the manufacturing PMI unexpectedly easing to 48.9. Finally, Sweden's Q4 GDP rose 0.5% quarter-over-quarter, broadly as expected, and by 0.2% year-over-year.
On the inflation front, the most significant news internationally this week was from the Eurozone, with the February CPI surprising to the upside. Headline inflation eased only slightly to 8.5% year-over-year, while core inflation quickened further to 5.6%, the fastest pace of record. Services inflation quickened to 4.8%, which was also the fastest pace on record. The firm inflation readings were relatively broadbased not only across categories but also across countries. Looking at national-level data for February, this week also had upside (harmonized) CPI surprises for Germany (9.3% year-over-year), France (7.2%), Spain (6.1%) and Italy (9.9%). The firm February inflation reading, in our view, clinches the case for a 50 bps rate increase from the European Central Bank (ECB) at its March monetary policy meeting, a move that had already been very clearly signaled by the ECB at its most recent policy announcement. It also suggests upside risk to our current base case forecast for 25 bps increase at the ECB's May meeting.
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