tourism

The recovery in Spanish tourism seems to be slowing down. While the number of international visitors in July was still at 92% of its pre-pandemic levels, this dropped to 87% in August Tourists in Benidorm, Spain International tourism at 87% of pre-pandemic levels in August The gloomy economic outlook and the uncertain geopolitical situation now seem to be slowing down the recovery of the Spanish tourism sector. In August, Spain welcomed 8.8 million international tourists, equivalent to 87% of its pre-pandemic level. In July, 9.1 million international tourists visited Spain, which then corresponded to 92% of its pre-pandemic level. Also, total expenditures by international tourists, corrected for inflation, dropped to 85% of pre-pandemic levels in August, from 88% in July. These figures show that it will probably take another year for international tourism to return to pre-pandemic levels. The slowdown in domestic tourism was even greater than that of foreign tourism. The number of hotel stays booked by residents fell to 101% of pre-pandemic levels in August, from 107% in July. International tourists entering Spain, in % of pre-Covid levels Tourism will still support economic activity in 3Q but outlook is weaker As tourism is an important economic sector in Spain, contributing 14% to total GDP in 2019, according to the World Travel and Tourism Council, a sustained recovery is an important factor for economic growth. The tourism sector has held up much better than the rest of the economy so far. Although the recovery appears to be slowing, tourism will still continue to support Spanish economic activity in the third quarter of 2022. However, the new figures also show that the contribution of tourism to Spain's economic growth is likely to fall in the coming months as the eurozone heads towards recession. In the second quarter, Spain's economy still grew by 1.5% on a quarterly basis, thanks to strong growth in domestic demand and the revival of tourism. However, the third quarter looks set to be weaker than the second. The latest manufacturing PMI released last Friday showed that factory activity contracted in September due to high inflation and a falling number of new orders. The PMI index fell to 49.0 last month from 49.9 in August, staying below the 50.0 mark that separates growth from contraction. Also, consumer confidence fell again in September which does not bode well for consumption in the third quarter. For the third quarter, we expect a slowdown in the economy followed by a slight contraction in the fourth quarter. Year-on-year growth would then reach 4.3% over the full year. For 2023, we expect growth between 0 and 1% as the energy crisis will continue to weigh on the outlook. Read this article on THINK TagsTourism Spain GDP Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The world is eagerly awaiting the return of Chinese tourists since Covid-19 measures were lifted. But now that Chinese people can travel abroad again, will they be returning to Europe soon?  Italy is the most popular country in the EU for Chinese visitors Chinese wanderlust on the rise Chinese people are becoming more and more enthusiastic about travelling. This is evident from the latest Chinese traveller sentiment report from December 2022. Four in ten Chinese respondents said that they would like to go on a trip again. A year earlier, in December 2021, this applied to only two in ten Chinese. Now that Covid-19 restrictions have been fully lifted, the percentage of willing travellers is expected to increase further.  More Chinese people are eager to travel Attitude of Chinese people towards travel Source: Dragontrail.com.cn, ING Research Jump in visitors from Mainland China to Hong Kong after border reopened The increasing desire to travel among Chinese people can also be illustrated by two other factors:  On the day China announced it was lifting all virus restrictions, the booking site Trip.com recorded the highest number of searches for international flights and accommodations in three years. The number of Chinese visitors from Mainland China to Hong Kong has soared. On 8 January 2023, the border between Mainland China and Hong Kong reopened. Last year there were only 370,000 visitors from Mainland China to Hong Kong. Since the reopening this year, one million people have crossed the border so far.  There has been a huge jump in Chinese visitors to Hong Kong since the border reopened Number of visitors from Mainland China to Hong Kong (x 1,000) Source: Data.gov.hk, ING Research European tourism still below 2019 levels The big question is how soon will Chinese tourists return to Europe again, and what impact will that have on the European tourism industry? Tourism has been hit hard by the Covid-19 pandemic, particularly in 2020 and 2021, with the number of guests in accommodations almost halving. Despite a strong recovery in 2022, the number of tourists in the European Union reached 91% of the pre-pandemic level by the end of 2022. In Italy and Germany, in particular, there were still significantly fewer tourists in 2022 than before the pandemic. In Spain and Belgium, on the other hand, the number of tourists was close to the 2019 level.  Fewer tourists in the EU in 2022 than before the pandemic Number of  tourists in accommodations in 2022 compared to 2019 Source: Eurostat, ING Research Italy is the most popular country in the EU for Chinese visitors The share of Chinese tourists visiting the European Union each year is marginal, at 1.3%. In 2019, 13 million Chinese tourists came to the EU. Italy is by far the most popular country for Chinese tourists, followed by Spain and Belgium. In 2019, nearly 3.2 million Chinese tourists came to the country of ‘la dolce vita’, accounting for 2.4% of all tourists that year. In the last three years, the proportion of Chinese tourists in Europe has been negligible due to Covid-19.  Italy is the most popular country in the EU for Chinese visitors Share of Chinese travellers out of the total number of travellers in 2019 Source: Eurostat, ING Research Outlook According to the China Outbound Tourism Research Institute, 18 million Chinese tourists will travel internationally in the first half of 2023, followed by 40 million tourists in the second half. That is about 40% of the number of travellers in 2019. Initially, Chinese people are expected to visit destinations close to home, such as Hong Kong, Macau, Thailand and Singapore. It is not expected that the number of Mainland visitors to Europe will really start to pick up until the summer. There are several reasons for this: Just like in the rest of the world, it will take several months for international travel to restart their operations. Not only is there a lack of capacity for international flights, resulting in high ticket prices, but Chinese travellers also face long delays in getting passports and visas.  Many of them prefer family visits in their own country, as this has not really been possible in recent years.  Several countries worldwide still have specific travel restrictions related to travel from China. For most European countries, for example, Chinese tourists still need a negative Covid test upon arrival. While the return of Chinese tourists to Europe will begin around the summer of 2023, we expect the real boost for European tourism to take place in 2024. Read this article on THINK TagsTourism Eurozone China Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Crypto Industry News: El Salvador recognized BTC as legal tender in 2021. According to the authorities, this has led to increased interest in the country in terms of tourism. Added to this is the renewable energy development program at Metapan, which aims to use solar and wind energy to power bitcoin miners. Now it turns out that Tether is one of the investors in the mentioned renewable energy project. As part of it, Volcano Energy, a 241 megawatt (MW) renewable energy center, was created in Metapan.   It is expected to generate 169 MW of solar energy and 72 MW of wind energy. The energy produced will power the BTC mines in El Salvador. Tether estimates that the park's computing power will exceed 1.3 exahash per second. This would mean that Volcano Energy would be one of the largest cryptocurrency mines in the world. Tether's chief technology officer, Paolo Ardoino, said the investment fits into a broader vision.   The company wants to invest in the production of renewable energy, as well as in mining infrastructure. Volcano Energy CEO Josue Lopez added that "over 52% of bitcoin is currently issued sustainably." It is not known exactly how much Tether invested.   The total cost will be USD 1 billion. Technical Market Outlook: The ETH/USD pair has bounced back above the level of $1,839 and is trading above the 50 and 100 MA. The next target for bulls is seen at the level of $1,913 and then possibly at the last swing high located at $1,928. The intraday technical support is seen at the level of $1,839 and $1,822. The strong and positive momentum on the H4 time frame chart supports the short-term bullish outlook for ETH.     Weekly Pivot Points: WR3 - $1,962 WR2 - $1,919 WR1 - $1,894 Weekly Pivot - $1,877 WS1 - $1,851 WS2 - $1,834 WS3 - $1,791   Trading Outlook: The Ethereum market has been seen making lower highs and lower low since the swing high was made in the middle of the August 2022 at the level of $2,029. This is the key level for bulls, so it needs to be broken in order to continue the up trend. The key technical support is seen at $1,368, so as long as the market trades above this level, the outlook remains bullish.  

After facing three years of headwinds to economic growth, the economies of Central and Eastern Europe (CEE) might just be on the verge of an upturn. So far this year, most economies have managed to avoid the most pessimistic forecasts.   And moving into the second half we see the region ‘making the best’ of an admittedly still challenging environment. In our main article we analyse which economies in the region might be able to benefit from: (1) modestly improving trade trends; (2) lower energy prices; and (3) the return of tourism to pre-pandemic levels.   While forecasts for a rebound in global trade are not particularly aggressive, trade has already delivered an important offset to poor domestic demand in the region. In theory, the more open economies of Hungary and the Czech Republic stand to benefit more from the improvement in merchandise trade volumes. Lower energy prices benefit the region as a whole – particularly Turkey.   Higher energy prices wreaked havoc on CEE external balances last year and lower prices this year are most welcome. Lower energy prices also support governments – in the likes of the Czech Republic and Poland – in encouraging fuel retailers not to expand margins. This will help the disinflation process across the region. When it comes to tourism, Turkey, Hungary and Poland have all typically enjoyed net positive tourism receipts.   Romania notably runs a net negative position here. A return of tourism to pre-pandemic levels can certainly provide some support.   These effects will be felt more keenly in Croatia and Bulgaria, where tourism is worth one-fifth of GDP. Incorporating these trends into our overall forecasts for the region, our team of economists feel that growth trends will improve in the second half. A major driver of this will be the broad disinflation process, where we forecast 2024 inflation at roughly half that seen in 2023.   The evidence of disinflation should be enough to start/extend easing cycles in Hungary, the Czech Republic and even a one-off cut in Poland this year. Romania may be tempted to join in with lower rates if it sees peers making the move.   The clear disinflation process should also mean less pressure on real household incomes and suggests that domestic demand will not weigh as heavily on activity as it has done during the recent cost of living crisis. However, there will be key differences across the region driven by the local political climate. Fiscal policy is one clear example here. Fiscal policy looks set to stay loose into October elections in Poland, while the Czech Republic is embarking on an aggressive fiscal consolidation programme.   Equally politics plays a role in the region’s access to EU funds, where we should know a lot more by September/October this year. Turkey, again, is very much focused on its own political cycle. A new economics team faces a much greater challenge in getting inflation under control. It is early days, but hints of more orthodox policy points to large rate hikes through the summer.   Looking further across the region, we note the improvement in Ukraine’s FX reserves amidst the tragedy of the ongoing conflict. As always, this Directional Economics showcases ING’s global reach with our local team of experts in the CEE region. Please reach out to them with any questions. We very much hope you enjoy reading it as much as we do sharing our latest views.

2023 will prove another tough year for global growth. Central bankers in most advanced economies will keep their collective foot on the monetary brake pedal. Yet trade volumes and tourism should improve, plus energy prices are substantially lower than a year ago. In this article, we take a look at how selected Central and Eastern European (CEE) economies could benefit on a relative basis.   Key observations • Looking at what an improvement in the external trade environment could mean for the region, we note Hungary and the Czech Republic are the more open economies, Poland and Romania the more closed. Turkey’s more geographically diversified trade mix has helped. Better trade trends should prove an important offset to weaker domestic demand in the region, although we caution that foreign value-add in exports is quite high. Given the recent Turkish lira depreciation, sectors using imported inputs at the lowest rate, eg, labour-intensive industries, could fare better.   • The spike in energy prices did most of the damage to the external imbalances over 2021-22 and falling prices should now be a welcome boon – especially to Hungary and Turkey. Lower energy prices may also give governments more room to pressure margins of the fuel retailers – helping to make the case for rate cuts especially in the CE4 region later this year. Romania’s relative self-sufficiency in energy suggests it will not be a major beneficiary of this story.   • When it comes to tourism, none of the selected CEE countries we cover in this article come close to the near 20% of GDP that tourism represents in the likes of Croatia, Bulgaria and Montenegro. Yet a further recovery in tourism back to pre-2019 levels would certainly be positive for the likes of Turkey, Hungary and Poland – countries that run net positive balances in terms of tourism receipts.   Current account evolution by components: 2022 vs 2019 (% of GDP)

Restrictive monetary policy, tighter credit conditions and declining confidence levels point to slowing growth in many parts of the world. The Central and Eastern Europe (CEE) region is no exception, where weakening domestic demand will keep growth rates under pressure. In later sections of this Directional Economics publication, we discuss whether policymakers will be in a position to address this slowdown with easier monetary policy. Yet the prospect of lower policy rates is not the only positive for the region. In this article, we look at which of our selected countries in the CEE region stand to benefit from: (1) a pick-up in trade volumes; (2) the drop in energy prices; and (3) a rebound in tourism   Indices of global exports, energy prices, tourism; 2019 = 100   At a first glance, the CEE is seen as a group of countries that share a few similarities, such as membership in regional economic and political unions, a similar level of income and population, global supply chain specialisation, historical connections, negative current accounts and a high role of trade with the EU. That said, there are differences within the group that call for a separate analysis of the exposure to global trends.   For example, the Czech Republic is a slower-growing developed economy by international standards, while the rest are faster-growing developing economies. There are as well differences in the domestic and foreign policy course that also affect the economic ties.   We see several channels through which the outlined global trends manifest themselves in the economic realities of the CEE. Physical trade volumes and services/tourism are factored into net exports and economic growth, the values of trade are contributing to current accounts and FX expectations, while commodity inputs affect the CPI trends (and the current account).   In this article, we explore the exposure of selected CEE countries, the Czech Republic, Hungary, Poland, Romania and Turkey – as a group and individually – in terms of these channels and see how they factor in the expected economic and financial performance. To set the scene, we look at which countries in the region stand to benefit the most from the pick-up in trade. Global merchandise trade surpassed pre-Covid levels in 2021 but has proved sluggish since. Yet factors like the expected, but so far delayed, Chinese recovery, lower shipping costs and a weaker dollar should support trade over coming years.   The IMF expects global merchandise trade to return to 3-4% pa growth rates in 2024-25 after temporarily slowing to 1.5% in 2023.   Another positive trend we examine is that of the sharp decline in energy prices. After a 63% spike in 2022 (including a 100% spike in natural gas) global energy prices (oil, gas, coal) are expected to post a 40% decline this year, according to the IMF. While we acknowledge that energy prices are subject to upside risks (largely supply related), there are big differences in how lower energy prices will play out across the region – both through energy’s share of imports and weight in CPI baskets. And lastly, we look at the positive expectations for tourism, which unlike merchandise trade has yet to recover to pre-pandemic levels.   This is bouncing back with the removal of epidemiological constraints and a catch up on the previously under-consumed services. According to UNWTO (World Tourism Organization), despite showing 86% YoY growth in 1Q23, the number of international arrivals globally is still 20% below 1Q19 levels. The reopening of China is one of the most important factors supporting expectations of further recovery. UNWTO’s panel experts expect better tourism performance later this year and a return to 2019 levels in 2024 or somewhat later. We take a look at how each of the three factors will impact countries across the region

Georgieva also entered the topic of cryptocurrencies. She emphasized that in her eyes these are rather "speculative" assets, not currencies. This should not surprise us, because the institution managed by it has long approached bitcoin with reserve.   She opposed, for example, the adoption of bitcoin in El Salvador and the recognition by the government of President Nayib Bukele of cryptocurrency as a means of payment. The IMF claimed that the government's policy would worsen the country's economic situation. As we know, that didn't happen. On the contrary: Bukele's actions improved the image of his country and strengthened local tourism. This does not change the fact that the IMF will rather not seek to strengthen bitcoin adoption, because politicians cannot control cryptocurrencies to the same extent as CBDC. Georgieva also entered the topic of cryptocurrencies.   She emphasized that in her eyes these are rather "speculative" assets, not currencies. This should not surprise us, because the institution managed by it has long approached bitcoin with reserve. She opposed, for example, the adoption of bitcoin in El Salvador and the recognition by the government of President Nayib Bukele of cryptocurrency as a means of payment. The IMF claimed that the government's policy would worsen the country's economic situation. As we know that didn't happen.   On the contrary: Bukele's actions improved the image of his country and strengthened local tourism. This does not change the fact that the IMF will rather not seek to strengthen bitcoin adoption, because politicians cannot control cryptocurrencies to the same extent as CBDC. Technical Market Outlook: The ETH/USD pair has broken above the technical resistance located at the level of $1,758 and hit the 61% Fibonacci retracement level located at $1,811. The local high was made at the level of $1,825 (at the time of writing the analysis).   The intraday technical support is seen at the level of $1,777, so please keep an eye on this level as the pull-back can happen soon. The market conditions are extremely overbought on the H4 time frame chart. Please notice, the Ethereum market rallied over 12% from the low made at the level of $1,620.      

Spain’s housing market is contracting, but a soft landing remains likely The Spanish housing market has experienced a notable decline recently. However, despite the sharp rise in interest rates, there are enough mitigating factors that make a soft-landing scenario likely. We forecast 1% average price growth this year and 0% next year.   Spanish housing market sees 21% drop in sales in April The Spanish housing market has entered a clear slowdown recently, with several factors contributing to reduced demand for property. Rising interest rates, tighter credit conditions and global economic uncertainties, including geopolitical instability, have all dampened housing demand. In April, mortgage demand fell below its five-year average for the first time and the number of transactions also showed a clear downward trend in the first few months of this year. The latest figures from notaries, which are usually ahead of the official figures, suggest that this downturn is likely to continue in the coming months. According to the General Council of Notaries, home sales fell 21% in April compared to the same period last year, while the number of mortgage loans to buy a home fell by 32% year-on-year. However, the downturn is much less severe than in other countries, where mortgage demand has fallen even more sharply. This can partly be attributed to increased interest from foreign buyers following the relaxation of Covid restrictions in 2020 and 2021. Property scarcity also remains a persistent problem. Demand has exceeded supply in recent years, slowing the downturn in demand. Moreover, Spain's economy has performed better than the eurozone average, helped by a rebound in tourism, which has also supported the housing market.    

The outcome of the Spanish elections could lead to changes in economic policy. However, the reactivation of European fiscal rules in 2024 limits the extent to which fiscal policy can be adjusted, limiting the risk to our growth outlook.   Uncertainty surrounding Spanish elections Following major losses in the recent regional and local elections on 28 May, Prime Minister Pedro Sanchez of the Socialist Workers' Party (PSOE) has called for early elections in Spain. Although the latest polls indicate a shift to the right side of the political spectrum, the outcome of the upcoming elections remains uncertain. If the polls are correct, the conservative People's Party (Partido Popular) will get the most votes, but not the majority to form a government. In such a scenario, the third-largest party, the far-right Vox, will play a decisive role in forming a government. As elections approach in Spain, the political landscape is characterised by high fragmentation and polarisation. Over the past decade, the Spanish political landscape has undergone a significant transformation, with a remarkable increase in the number of parties. This fragmentation has led to greater instability as coalition governments must now be formed, which often rely on a fragile consensus. Based on the latest polls, it seems likely that another coalition government will have to be formed.     How the Spanish election could affect the economic outlook Spain's economy has outperformed that of other eurozone countries over the past year, but is still weighed down by structural weaknesses such as high debt, low productivity and a rigid labour market. Despite a historically low unemployment rate, it is still among the highest in the eurozone and youth unemployment is alarmingly high. Moreover, the country has still not fully recovered from the pandemic, despite last year's impressive growth figures. The elections could also be the starting point of a longer period of political instability, although this is not our baseline scenario. This could happen if the election results make it difficult to form a stable majority, leading to protracted government negotiations. In addition, there is still a real possibility that a clear majority cannot be formed, which would lead to a hung parliament necessitating new elections and prolonging political uncertainty. In such a scenario, crucial structural reforms needed for the economy may be delayed, reinforcing existing weaknesses. Persistent uncertainty about future government policies could also undermine investor confidence and hamper investment activities. If a new right-wing government comes to power, it could bring about a change of course in economic policy. Conservative leader Feijóo has already announced plans for more business-friendly policies and tax cuts, including a proposed income tax cut for people earning less than €40,000 a year. There is also a real chance that the planned closure of nuclear power plants in 2027 will be postponed to secure energy supplies. The extent of these policy shifts will depend on the consensus among coalition partners and the strength of their majority. If the right-wing Conservatives and Vox form a comfortable majority, they will feel more supported to reverse certain previous government policies. Despite a possible change of direction in economic policy, there is little room to shift to a more stimulative fiscal policy. Spain's public debt ratio is one of the highest in the eurozone at 113.2%. Spain ranks below Greece (171.3%), Italy (144.4%) and Portugal (113.9%). According to current forecasts, Spain will overtake Portugal in the ranking this year. This shift is due to a lower expected government deficit in Portugal combined with slightly better growth prospects. Spain recorded a deficit of 4.8% of GDP in 2022, and both our forecast and that of the Bank of Spain suggest that the deficit will remain above the 3% threshold at least until 2025. This level is considered an excessive deficit by the European Commission. The reactivation of European fiscal rules in 2024 will increase pressure on fiscal consolidation measures. Regardless of the election outcome, addressing public finances will be inevitable, further limiting the government's flexibility to pursue more expansionary fiscal policies.   Government debt to GDP ratio, 2022   New government will take office amid a slowing economy Spain's economy was the fastest-growing of all larger eurozone countries in the first quarter, growing 0.6% quarter-on-quarter. Like other southern countries, Spain benefited from growth in net exports driven by a continued rebound in tourism. In addition, the Spanish economy benefited from some structural differences, such as a relatively smaller industrial sector compared to, for instance, Germany. It is precisely this energy-intensive industry that has suffered the most from higher energy prices and tightening financial conditions. Finally, Spanish energy prices, partly due to the introduction of the gas price cap, have not risen as much as in several other countries. Despite the good start, maintaining this positive momentum may be challenging. Although several factors such as a pick-up in wages, improvements in global supply chains, falling energy prices, and government support packages are giving some tailwind, the tightening of financial conditions will increasingly cast a shadow on the economy. It is hard to imagine that the rapid and significant increase in policy interest rates will not significantly slow economic growth. The external environment is also expected to weaken further, with the eurozone experiencing a technical recession over the past two quarters, China's economic recovery falling short of expectations and US growth expected to slow. This could also affect Spain's tourism sector. A slowdown in the global economy could lead to less international travel, limiting the growth of the tourism sector in 2024.   Spain recorded the strongest growth among larger euro countries in the first quarter      

Tourism will be the main growth driver this year The slowdown in the Spanish economy can be attributed to the overall deceleration of the global economy. Nevertheless, Spain is poised to become the best-performing economy among the larger eurozone countries this year. We forecast average growth of 2.2% for Spain this year, well above the eurozone average of 0.4%. Continued growth in the tourism sector will be the main driver of Spain's higher growth rates. Although the number of international tourists entering Spain in 2022 was still 14% below pre-pandemic levels, the gap may be closing this year. In May, the number of international visitors had already risen to 104% of the pre-pandemic level, compared with 88% in May 2022. Strong travel demand points to a promising tourist season ahead. Contributing about 15% to GDP, the tourism sector will remain one of the main catalysts for economic growth throughout the year.   The number of foreign tourists increased above pre-Covid levels in April and May (in millions)     Spanish headline inflation reaches 1.9% Spanish inflation has fallen faster than in other eurozone countries. In June, Spanish inflation stood at 1.9% year-on-year, while the eurozone recorded 5.5%. These positive developments can be attributed to more favourable base effects from energy prices, which rose faster in Spain than in other countries last year. However, if these favourable base effects fade in the coming months, Spanish headline inflation could rise again. In addition, the phasing out of several government measures by early 2024 is expected to have an upward effect on inflation. Spanish core inflation, excluding energy and food prices, remains remarkably high at 5.9% and is even above the eurozone average of 5.4%. Core inflation is expected to remain at a high level throughout the year and gradually decline. Yet there are indications that core inflation is also on a sustained downward trend. For instance, inflation in the buoyant hospitality sector, which accounts for 14% of the inflation basket, is cooling markedly despite strong sustained demand on the back of a strong tourist season. Core inflation is expected to remain at high levels throughout the year and only gradually decline.   Slowing momentum despite tourism recovery For 2023, we expect growth of 2.2%, well above the eurozone average of 0.4%. Although the economy performed strongly in the first quarter, momentum is expected to wane as financial conditions tighten. The main driver of growth will be net exports, supported by the continued recovery of the tourism sector, which surpassed pre-pandemic levels in May and April. Although headline inflation fell to 1.9% in June, it is expected to rise in the coming months due to less favourable base effects for energy and persistent core inflation.   Spanish economy in a nutshell (%YoY)  

While other eurozone countries are recording significant declines in headline inflation, the downward trend in Austrian inflation is, optimistically speaking, sluggish. This decreases Austria's attractiveness, both in terms of industry and tourism, and will ultimately lead to a decline in the country's competitiveness   Better than expected, but far from good After the first flash estimates indicated that the Austrian economy had contracted slightly by 0.3% quarter-on-quarter in the first quarter of 2023, the final revision revealed a small increase of 0.1% quarter-on-quarter, which could be considered stagnation rather than growth. While the construction sector and other economic services supported economic activity in the first three months of 2023, the slowdown in activity in the manufacturing, trade and transport sectors had a negative impact. As in the rest of the eurozone, Austria is witnessing a divergence between industry and services. Looking ahead, however, this divergence doesn’t look sustainable. In fact, due to the loss of consumers' purchasing power and accelerating service inflation, the outlook for the services sector is also expected to become gloomier. Sticky inflation to weigh on services sector While other eurozone economies have recorded significant declines in headline inflation, the downward trend in Austrian inflation has been sluggish so far. In June, headline inflation in Austria came in at 7.8% year-on-year, against 5.5%YoY in the eurozone. Compared with the peak reached in October last year, headline inflation in the monetary union fell by 5.1 percentage points. In Austria, the decline in headline inflation between October 2022 and May this year was 3.8 percentage points only – the disinflationary trend beginning to unfold in other eurozone economies is being sought in vain in Austria. This will affect the service sector in two ways. First, private consumption will suffer from persistently high price levels, especially since part of the cost of living is determined by administered prices, which in Austria are mostly indexed and thus increased based on inflation. This applies, amongst others, to public services, the rent of social housing or telecommunications. Moreover, services inflation is tending to accelerate, and there is no sign of an easing of price pressures in the sector. Second, persistently high inflation will cause Austria's tourism sector to lose competitiveness. The hotels and restaurants component of the inflation basket recently became 13.1% more expensive year-on-year, and recreation and culture went up by 7%. In the eurozone, inflation in these categories was 8.4% and 5.7% respectively. If tourism in Austria becomes significantly more expensive than in other eurozone countries, tourists might switch to other holiday destinations. Inflation in the services sector is also likely to be amplified by wage increases. Wages in the Austrian accommodation and food services sector increased by around 28% between the fourth quarter of 2019 and the first quarter of 2023. In the eurozone, wages in the sector came up by 16% over the same period. Strong wage growth in this sector was probably the result of a particularly high lack of skilled workers.

Tourism will be the main growth driver this year The slowdown in the Spanish economy can be attributed to the overall deceleration of the global economy. Nevertheless, Spain is poised to become the best-performing economy among the larger eurozone countries this year. We forecast average growth of 2.2% for Spain this year, well above the eurozone average of 0.4%. Continued growth in the tourism sector will be the main driver of Spain's higher growth rates. Although the number of international tourists entering Spain in 2022 was still 14% below pre-pandemic levels, the gap may be closing this year. In May, the number of international visitors had already risen to 104% of the pre-pandemic level, compared with 88% in May 2022. Strong travel demand points to a promising tourist season ahead. Contributing about 15% to GDP, the tourism sector will remain one of the main catalysts for economic growth throughout the year.   The number of foreign tourists increased above pre-Covid levels in April and May (in millions)

Italian business confidence falls in August The deterioration in confidence is more marked in industry and construction, but services are not immune either. Consumers remain relatively upbeat, possibly helped by a resilient labour market. This all points to a stagnating economic environment.   Consumers remain relatively upbeat Consumer confidence only slightly edged down to 106.5 in August (from 106.7 in July). The deterioration in the perception of the current and future economic climate contrasts with the improvement in personal circumstances. We believe this has to do with the combination of declining inflation and a very resilient labour market. Indeed, the unemployment expectation component of the survey slowed down on the month. When matching this with an increase in the current opportunity to save sub-index, we sense that a possible stabilisation in the savings ratio might be in the making, limiting the scope for a strong pick-up in private consumption, at least in the short term.   Manufacturing confidence softens further On the business front, confidence unsurprisingly declined again among manufacturers to 97.8 (from 99.1 in July), the lowest level since January 2021. Here, softer orders coupled with a stable inventory component resulted in a decline in the production expectation component. Softer demand in key export destination countries such as Germany and, to a smaller extent, China, is apparently taking its toll, with the domestic component unable to compensate. Interestingly, the investment goods segment seems less affected, suggesting that some demand linked to the implementation of the Recovery and Resilience Facility might still be in place.   Construction confidence fall suggests that the effect of tax incentives is fading The six-point decline in the construction confidence index to 160.2 (from 166.5 in July) sends a warning signal. While the index remains close to its historical highs, the push coming from the residential component is gradually fading as generous tax incentives come to an end. While the existing backlog of orders related to incentives looks set to keep the sector afloat into year-end, the exceptionally high contribution of construction investment to GDP growth looks set to vanish in 2024.   Services only marginally down, with tourism relatively weak Confidence in market services fell to 103.6 in August, from 105.5 the previous month. The decline affected all big aggregates, except information and communication. Interestingly, it also affects tourism services, where an improvement in the current affairs component contrasts with declining order expectations. This broadly fits with other evidence available pointing to a good summer tourism season.      Modest GDP growth in the second quarter still possible All in all, today’s confidence data suggest that conditions are still ripe for the continuation of a soft economic environment. After the disappointing 0.3% GDP contraction in the second quarter (we will get the full details for this on Friday), a very small rebound still looks possible in the third quarter. Whether this will materialise or not will depend on whether services are strong enough to compensate for industrial weakness. We still hold average Italian GDP growth of 1% in 2023 as our base case.

The third quarter may still be saved by tourism in the eurozone, but the latest data points to a more pronounced slowdown in the coming months. Inflation is falling, but a last interest rate hike in September is not yet off the table. The European Central Bank will be hesitant to loosen significantly in 2024, limiting the scope for a bond market rally.   Business sentiment in contraction territory In spite of heatwaves and wildfires, the tourist season seems to have been strong in Europe. It has continued to support growth in the third quarter following a better-than-expected growth figure in the second quarter. However, with the end of the summer in sight, we're now beginning to see a more sobering economic outlook emerge. The composite PMI survey for August was certainly a cold shower, falling to the lowest level in 33 months at 47 points. While the figure has already been in contraction territory in industry for some time, it has now fallen below the boom-or-bust level in the services sector. Deteriorating order books weighed on confidence in both the manufacturing and the services sector, which also explains why there were job losses in manufacturing while hiring plans in the services sector were put on a slow burner. This will probably stop the decline in unemployment in the eurozone. Disappointing external demand A softer labour market might lead to higher savings rates, thereby countering the positive impact on consumption of rising purchasing power. At the same time, the much-anticipated export boost is unlikely to materialise as the US economy eventually starts to cool while the Chinese recovery continues to disappoint. Finally, with a rapidly cooling housing market on the back of tighter monetary policy, the construction sector is also likely to see a slowdown. All of this explains why we still don’t buy the European Central Bank's story that economic recovery will strengthen on the back of falling inflation, rising incomes and improving supply conditions. We expect the winter quarters to see close to 0% growth, resulting in 0.6% annual GDP growth for both this year and next year.   Cooling housing market is likely to weigh on construction activity   Inflation is coming down, slowly While inflation is clearly trending down, the pace might still leave the ECB uncomfortable. Industrial goods prices have started to fall, but services prices are still growing monthly above 4% in annualised terms. Negotiated wage growth seems to have reached a plateau just below 4.5%. Still, given the slow productivity growth (with the decline in hours worked as one of the important drags), final demand will have to be very weak to prevent higher wages from feeding into higher prices. We expect headline inflation to hit 2% by the end of 2024, but over the coming months, core inflation remains likely to hover around 5%. As the recent trend in underlying inflation is one of the key determinants of monetary policy, this would lead to an additional rate hike.   Loan growth is close to stalling The ECB's job is almost done With credit growth now close to a standstill and money growth negative, there remains little doubt that monetary policy is already sufficiently restrictive and that the monetary transmission mechanism is working. On top of that, the median consumer inflation expectation for the period three years ahead fell back to 2.3% in June. So, it looks as though the job is nearly done. For now, we're still pencilling in a final 25 basis point hike for the ECB's September meeting – but it's a very close call. A pause would likely mean the end of the tightening cycle, as the faltering recovery will make it harder to continue raising rates afterwards. While we see the first rate cut by the summer of 2024, we can't imagine the central bank loosening aggressively next year. In her speech at Jackson Hole, President Christine Lagarde mentioned a number of structural changes that make the medium-term inflation outlook more uncertain, and we think that the ECB will keep short rates relatively high for some time to come. That will probably limit the potential for the bond market to rally strongly in the wake of the expected economic stagnation later this year.    

Swiss economy slows sharply Switzerland's GDP stagnated in the second quarter, with its industry suffering from the global economic slowdown. While inflationary pressures continue to ease, the Swiss economy is likely to remain sluggish over the next few quarters.   Swiss industry suffers Switzerland's GDP stagnated in the second quarter, following growth of 0.9% in the first quarter (adjusted for sporting events). This marked slowdown is primarily due to the downturn in manufacturing (-2.9% over the quarter), with the cyclical sectors suffering from the global economic slowdown. In addition, after years of very strong growth, the chemical-pharmaceutical industry is also contracting. This is weighing on Swiss exports of goods (-1.2% over the quarter). Meanwhile, the construction sector is being battered by rising interest rates. Investment in construction fell over the quarter (-0.8%), as did investment in capital goods (-3.7%). Private consumption remained strong (up 0.4% over the quarter), still buoyed by the post-pandemic rebound in the consumption of services, particularly in the hotel and catering sectors. Exports of services have also rebounded.   Headwinds likely to intensify Ultimately, while the Swiss economy has largely outperformed its European neighbours since the pandemic (Swiss GDP has risen by 5.6% since the end of 2019, compared with 3.1% for the eurozone), it now seems to have been caught up by major headwinds, namely the global economic slowdown and interest rate rises. It is only the strength of the service sector caused by the post-pandemic recovery, and in particular tourism, that has enabled Switzerland to avoid a contraction in GDP in the second quarter. The Swiss economy is likely to remain sluggish over the next few quarters, with all the leading indicators pointing to a continued slowdown. In particular, the PMI index for the manufacturing sector fell below 50 in December 2022 and has continued to decline since then, now reaching 39.9, its lowest level since 2008. Businesses are less confident and their order books are shrinking, while consumer confidence remains at a very low level. The Swiss economy is therefore likely to remain close to stagnation over the next few quarters. Ultimately, thanks to the strong start to the year, we are expecting growth to average 0.7% in 2023, compared with 2.7% in 2022. Growth in 2024 should remain weak and below the long-term average, at 0.6% for the year.   Inflationary pressures increasingly subdued Against this negative backdrop, one more positive factor remains. Inflationary pressures in Switzerland continue to moderate, and the loss of household purchasing power is smaller than elsewhere. In August, consumer price inflation stood at 1.6%, the same level as in July and slightly lower than in June (1.7%). For the past three months, Swiss inflation has therefore remained below 2%, in line with the Swiss National Bank's (SNB's) target. With wage growth remaining moderate, producer price growth back below 2%, import prices down year-on-year and the economy slowing, a sharp pick-up in inflation over the next few months seems unlikely. By intervening in the foreign exchange market to stabilise the overall effective exchange rate, as it did extensively in 2022, the SNB is able to control external inflationary pressures fairly easily. The only risk lies in rising rents, which in Switzerland are often indexed to the central bank's key rates, and could push inflation up a little in early 2024.   An uncertain central bank meeting Against this backdrop, the outcome of the SNB's monetary policy meeting scheduled for 21 September remains uncertain. It is not impossible that the SNB decides to make a final rate hike, focusing on the risks to inflation in the medium term and choosing to seize the opportunity as the end of the global rate hike cycle approaches. This would take the key rate to 2%, a total increase of 275 basis points since 2022, compared with 500 points for the Fed and 450 points expected for the ECB over the same period. However, with inflationary pressures moderating and the economy slowing, the likelihood of a further rate hike has clearly diminished.