GDP growth should pick up in 2Q in the major economies.
This is the indication provided the NECE Nowcasting models, that estimate GDP growth based on economic data (both confidence and real activity) available on the quarter.
Growth is driven by services, that continue to benefit from the post-pandemic boost, led by demand for services linked with recreational activities (travel, restaurants, hotels, etc...), hut hardest by the lockdowns of 2020-2021.
The opening quarter of the year confirmed expectations for ongoing, solid GDP growth in the US (+2% q/q annualised vs. +2.6% previously), driven by consumption and an acceleration in China (+4.5% y/y from 2.9%), boosted by reopenings in the wake of the government’s scrapping of its “Zero-Covid” policy, that had depressed growth at the end of last year.
By contrast, economic activity in the Eurozone incurred an unexpected, albeit marginal, decline (by -0.1% q/q), mostly impacted by the sharp contraction of Irish GDP (-4.6% q/q), typically very volatile, as well as by a drop of activity in Germany due to weak consumption. Net of Ireland, Eurozone GDP would have grown slightly. Italy was shielded from the disappointment, however, and achieved a strong recovery (+0.6% q/q from -0.1% previously), thanks declining energy prices, also supported by the measures put in pace by the government to counter rising energy bills, that enabled consumption to recover.
GDP growth should pick up in 2Q in the major economies.
This is the indication provided the NECE Nowcasting models, that estimate GDP growth based on economic data (both confidence and real activity) available on the quarter (accounting at present for around 78% of the total).
Growth is driven by services, that continue to benefit from the post-pandemic boost, led by demand for services linked with recreational activities (travel, restaurants, hotels, etc...), hut hardest by the lockdowns of 2020-2021. Expansion in the services sector is balanced by a contraction in the manufacturing sector, affected by weak global demand, that has shifted to services, and by the higher cost of credit faced by companies as a result of the interest rate hikes implemented by the major.
The divergence between services and manufacturing is observed in all the major economies, well illustrated by the evolution of sentiment in the two sectors (see chart below), whereas high-frequency data, for instance on flights and hotel reservations, confirm the expansion of services tied to the recreational sector.
The estimates for 2Q based on NECE models are detailed below:
• In the US, the models point to an ongoing expansion of the economy, albeit at a progressively less robust pace than in 1Q, by around +1.4% q/q (from +2% previously). The slowdown is mostly due to a less vigorous consumption dynamic than in the previous quarter, impacted by the Federal Reserve’s interest rate hikes and by inflation, that while on the decline, remains high.
• In the Eurozone and Italy the growth picture seems more uncertain: the NECE models outline a sharp discrepancy between the estimates based on confidence (soft data), that point to GDP growth in the order of +0.2% q/q, led by services, and estimates based on real activity (hard data), that, by contrast, indicate a contraction of GDP as a result of the drag represented by declining industrial output. On balance, growth estimates are only marginally positive, implying for the Eurozone a slight recovery of activity after the decline incurred in the previous quarter, as opposed to a slowdown in Italy after a quarter of very strong growth over the spring. Furthermore, the estimate is made more uncertain by the limited amount of real activity data available for the quarter (around 50% of the total), and by the shortage of real data on services (the few available readings refer to April at the latest).
• In China, data on 2Q GDP have already been published and reported ongoing economic activity growth, albeit at a slower pace than in the previous quarter: GDP grew by 0.8% q/q annualised from 2.2% previously, whereas the year-on-year change was 6.3%, up from 4.5% in 1Q. However, this was due to the favourable base effects tied to the comparison with 2Q 2022, when Chinese GDP contracted significantly as a result of the lockdowns imposed by the government. NECE models point to slightly stronger quarterly growth in 3Q 2023 than in the previous quarter, whereas unfavourable base effects should slow the year-on-year change roughly from 6.3% to 4.5%.
Going forward, the resilience capacity of growth over the coming quarters will depend on the balance of two opposite forces: the upward drive of easing supply-side constraints, falling energy prices for businesses and households, and the support offered to incomes by rising employment and wages, as opposed to downward pressures exerted by the restrictive monetary policy, the waning of the boost to services from reopenings, and from depletion of the excess savings built up by households during the pandemic. Signals of a slowdown of activity in the services sector came from June confidence data, together with the ongoing contraction of activity in the industrial sector, outlining the risk of the downward pressures prevailing. These developments should be monitored closely over the next few months.
N.B. Data are expressed as annualised quarterly percentage changes, in order to allow comparisons to be drawn between the different countries. The arrows indicate whether the forecast is for an acceleration or deceleration compared to the previous quarter.
APPENDIX ON METHODOLOGY
NECE (Now Economic Cast by Eurizon) estimates are obtained using the Nowcasting econometric estimation technique.
This technique allows the forecasting of very near-term, close to real-time GDP growth data, which is released on a quarterly basis and typically at a lag of between one and one-and-a-half months after the end of the quarter considered. The forecasts are drawn up based on the information provided by high-frequency economic data (typically released on a monthly basis), made available during the quarter to which forecasts are referred, and therefore ahead of the GDP reading, at least for what concerns the initial estimate. This explains the use of the word “now” to indicate the present situation, i.e. the GDP dynamic in the quarter under way, or in any case in the quarter to which the monthly data being released is referred. “Forecasting” of its own account, on the other hand usually refers to a technique used to produce longer-term estimates.
The forecasts drawn up using the Nowcasting technique change as new relevant information is made available and become progressively more accurate as the end of the quarter considered approaches, although they are still “forecasts”, and as such prone to error. The information may consist of both qualitative data, i.e. business and consumer confidence indices (soft data), or real activity data (hard data), such as industrial output, consumer spending, trade balance data, orders, etc. Lastly, some models (“mixed models”) are built using both types of data.
At the beginning of the quarter, the only information available refers to confidence data, followed by real activity data at a lag of around one month. At the present stage, the data available to estimate 2Q 2023 GDP growth consist of full quarterly confidence readings for all the countries, therefore referred to April, May, and June, whereas real activity data is only available for April and May for the US and China, and for April and a part of May for the Eurozone and Italy.