For 2Q, the NECE models (that estimate GDP growth based on economic data as they become available) provide reassuring indications on the resilience of global growth, pointing to an ongoing expansion of the US economy at similar rates to those observed in the opening quarter of the year, as opposed to a slowdown in growth in China and the Eurozone compared to 1Q.
The estimates yielded by the NECE models are described in greater detail below:
• For the Eurozone and Italy, the NECE models point to growth of between 0.1% and 0.2% q/q, slightly below the 0.3% q/q progress made in 1Q, when a number of one-off factors had offered support. This was the result of the more positive estimates yielded by the models based on confidence readings (soft data), that improved further in the quarter thanks to the services sector, as opposed to the more negative indications provided by real activity data (hard data), that point to weaker GDP growth, mostly as a result of manufacturing sector hardships. In essence, the latest data draw the picture of a dual-speed economy, driven on the one hand by services, and by tourism in particular, and held back on the other by weak industrial activity.
• In China, 2Q GDP data have already been released and highlighted a slowdown in growth (from 5.3% to 4.7% y/y, very close to the central estimate obtained using the NECE models). This was due to imbalances between the ongoing, solid expansion of the industrial sector, driven by exports, weakening domestic consumption and investment demand. In the absence of new stimulus measures from the government, capable of supporting consumption and revamping the real estate market, the ultra-advance forecasts for 3Q based on June data signal a further slowdown of GDP growth, to around 4.4% y/y (below the government’s 5% target).
N.B. Data in annualised quarterly percentage changes, in order to guarantee the comparability of countries. China is the sole exception, for which GDP data and forecasts are expressed as year-on-year percentage changes. The arrows indicate whether the forecast are for an acceleration or deceleration compared to the previous quarter.
Downside risks weigh on the outlook for the second half of the year, stemming from (geo)political uncertainties
Gong forward into the second half of the year, the most recent business confidence data signal downside risks to growth. While still in positive growth territory, June confidence data brought an unexpected deterioration in the major countries, indicating that the recovery is losing momentum. This is surprising, considering the downtrend of inflation and ongoing employment and wage growth, a positive combination for the recovery of the purchasing power and spending capacity of households, which should support growth
The worsening of confidence is probably tied to the drag deriving from the restrictive monetary policies of the Fed and the ECB, which affects credit growth, but also to the heightened geopolitical uncertainty, with particular reference to evolution of the war scenario in Ukraine and the crisis in the Middle East, to trade tensions with China, and the to more recent uncertainties clouding the formation of a new government in France. This is particularly true for the Eurozone, more exposed to geopolitical risks due to its geographical position and to an economic setup that is more dependent on foreign trade (both in terms of raw material imports and product exports). The resulting uncertainty risks prompting businesses to postpone investment and households to rein in consumption, to the advantage of precautionary saving (an increase in propensity to save was already recorded in the opening months of the year both in Germany and in Italy).
The United States, on the other hand, enjoy greater strategic autonomy, therefore the continuation of the growth cycle will mostly depend on the resilience of the labour market, that for the time being is still on a solid expansion path, albeit at less robust rates than observed over the past three years, in the post-Covid phase, and more in line with the longer-term trend.
Lastly, in China growth is set to remain moderate in the absence of more incisive stimulus measures from the government.
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.and. 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.and. 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.