Second half growth is expected to be too weak for a decent growth rate for 2023 The technical recession will, in our view, be followed by weak growth. Investment is expected to be the main drag on growth during the remainder of the year, as higher funding costs and weak sales expectations kick in. GDP growth in the second half of 2023 needs to come from the expansion of service consumption by households, higher service exports due to a further rebound of inbound tourism (especially in the third quarter) and public expenditures. We also forecast goods exports to pick up again, but only sluggishly. Public expenditures are assumed to rise a bit less than initially anticipated, due to the recent fall of the government: this is likely to put a stop to the execution of a number of policy plans. Consumption of households so far has held up well during the energy crisis, even though the Netherlands also experienced a terms of trade loss due to the high prices of imported gas and therefore the loss of consumer purchasing power. Very strong employment growth (+6.4% compared to pre-pandemic) and high net nominal income growth for lower-income households (who have a high marginal propensity to consume) explain why. As inflation is coming down in the second half of 2023 while wage increases remain high, consumption of households is forecast to continue its (mild) growth, even though employment growth will not be as strong as in the past. Saving rates are coming down from still elevated levels, also providing support for consumption development to remain decent. Despite this support for consumption, GDP is forecast to expand by only 0.3% for the full year 2023, adjusted for working days.   Inflation is falling in 2023 thanks to energy base effects Although lower than the inflation rate of 11.6% in 2022, our forecast for 2023 is still at a high of 4.7%. Food and bars and restaurants are important contributors to the higher price level in 2023. Yet, inflation has been falling throughout the year. Headline consumer price inflation fell recently, from 6.8% YoY (HICP) in May to 6.4% in June. Core inflation (inflation excluding volatile items like energy and food) came down from 8.2% in May to (a still high) 7.1% in June. The deceleration in June was due to services and fuel, industrial goods and food, beverages and tobacco.   For energy and fuel, the fall in prices was smaller than in May due to statistical base effects, i.e. due to movements in the price level in 2022: the month-on-month changes in June 2023 were slightly negative. Such base effects for energy will be the main reason why we project the headline year-on-year inflation rate to move close to 2% in the last quarter of 2023.   Inflation falling with large negative energy base effects Change in harmonised index of consumer prices for the Netherlands year-on-year in % and contributions in %-points   Firms signal lower selling price inflation We see overall inflation pressures falling in the near future: selling price expectations of businesses for the next three months fell for the eighth month in a row in June. There is one major exception: services. Inflation of services is not forecast to decelerate as quickly as for food and industrial goods. For now, we are working with the assumption of wages decelerating in 2024 compared to the high numbers (of around 6% for bargained wages) of 2023. The forecast for headline inflation to fall to 2.3% in 2024 depends on that assumption. This scenario has become more likely now that demand for personnel from the public sector might slow a bit, as the government is adopting a caretaker mode for many months to come.   New method for measuring energy inflation distorts headline picture June was the first month in which Statistics Netherlands (CBS) used a new method for measuring energy inflation. While it used to only look at the prices of new contracts, it is now also taking existing (fixed-term) contracts into account. If this new method was used in the past, the 2022 inflation rate would have been a lot (i.e. more than 3%) lower than actually recorded, while for 2023 the rate of change would be much higher than observed now. Since Statistics Netherlands is not legally allowed to revise historical inflation figures, this means that all year-on-year inflation rates are somewhat distorted. As of June 2024, this issue is gone. Fortunately, the price levels of the old and new methods have been already quite similar in recent months. As such, the introduction of the new method had only limited effects on our recent forecasts

Very weak start to the second quarter is likely to result in a technical recession All else being equal, the revisions would have boosted the Netherlands' annual GDP growth forecast for 2023. However, we revise it slightly downwards to 0.3% quarter-on- quarter due to the very weak data that we observe for the start of the second quarter. The hard (seasonally adjusted) data for April and May on a month-on-month basis was especially disappointing: Construction production contracted by -5.3% MoM in April. Manufacturing production contracted by -3.9% MoM in April, while rising only 1.9% in May. Retail sales excluding motor vehicles (Eurostat definition) stagnated at 0.1% MoM both in April and May, while retail sales also excluding gas stations and pharmacies (Statistics Netherlands definition) contracted by -0.1% MoM in April and -1.4% in May. Gross capital formation on fixed assets contracted -2.9% MoM in April. Goods imports rose 7.2% MoM in April (to some degree due to the propping up of gas storage). Goods exports contracted -0.5% MoM in April. Domestic consumption stagnated at 0.0% MoM in April and expanded by 1.0% in May, being a positive outlier so far. Prices of existing homes fell -1.0% MoM in April and -0.6% in May. At the same time, sentiment data worsened in April, May and June. Also, we expect the inventory reduction cycle to continue in the second quarter, albeit at a lower rate than in the first quarter, since firms still consider their inventory levels as too high. All in all, our second quarter GDP forecast is a contraction of -0.5% QoQ. This implies a technical recession in the first half of 2023.   Technical recession and then weak growth Expenditures*, index 4th quarter of 2019 = 100    

Low growth after a technical recession in the Netherlands Dutch GDP is stagnating, with weak growth expectations of 0.3% for 2023. We forecast a technical recession for the first half of this year, followed by subdued growth during the rest of 2023 and 2024. Inflation is high but is expected to come down, providing some room for real income growth which should help household consumption.   Covid recovery even stronger than originally estimated thanks to a stronger current account National accounts data for the Netherlands were revised considerably, partially changing the narrative of the Covid experience for the Dutch economy. While the Covid trough in GDP in the second quarter of 2020 was a bit deeper than initially thought, GDP has been revised significantly upward. The quarterly figures for 2021, in particular, were revised higher, resulting in a GDP level in the first quarter of 2023 that was 1.7% higher than previously estimated. International trade was revised upwards strongly. The goods trade balance was an important contributor to the GDP revision. Consumption by households and inventories was also revised upwards, while public consumption was revised down a little. The revisions made the contraction at the start of this year appear more modest: the quarter-on-quarter growth rate for the first quarter was revised from -0.7% seasonally adjusted to -0.3%. All this means that GDP was 6.7% higher in the first quarter of 2023 than in the fourth quarter of 2019, just before the pandemic. This makes the GDP development of the Netherlands since the start of the pandemic stand out even more in comparison to its peers. In addition, gross national income was revised strongly due to upward revisions of the balance of primary income. This was mostly the result of large upwards revisions of (retained) profits of listed companies.   Large upward revision of Dutch GDP figure Gross domestic product of the Netherlands*, index 4th quarter of 2019 = 100  

  In analyzing the state of the British economy, this week's macroeconomic readings have provided a mixed outlook. With indicators such as wages, GDP, and industrial production under scrutiny, market observers are eager to gain insights into the potential depth of the recession and the Bank of England's (BoE) approach to interest rates.   Examining the released figures, renowned economist Walid Koudmani highlights the various nuances in the current economic landscape. Wages in the UK continue to rise, with average earnings for a 3-month period surpassing expectations at a 6.9% year-on-year (YoY) growth rate, slightly higher than the previous level of 6.7% YoY. However, the number of unemployment benefit claims has seen a significant increase of 25.7k, reversing the prior decline of 22.5k. Additionally, the quarterly change in employment of 102 thousand falls short of the previous level of 250k, although it exceeds expectations set at 85k.     FXMAG.COM: What do this week's macroeconomic readings - wages, GDP, industrial production - tell us about the state of the British economy? Will the recession be deep? Will the BoE continue to raise rates?   Walid Koudmani The macroeconomic readings released this week paint a mixed picture of the British economy. Wages in the UK continue to rise with average earnings for a 3-month period increasing by 6.9% year-on-year (YoY), slightly higher than the expected 6.8% YoY and the previous level of 6.7% YoY.  However, the number of unemployment benefit claims increased by 25.7k, reversing the previous decline of 22.5k. The quarterly change in employment amounted to 102 thousand, surpassing the expected 85k but lower than the previous level of 250k. The rise in wage growth is a concern as it could indicate persistent inflationary pressures to come which could lead to a decline in consumer spending, leading to a negative impact on economic growth.  Overall, the macroeconomic readings released this week do not provide a clear picture of the state of the British economy. However, they do suggest that the economy could be facing some headwinds, such as rising inflation and slowing growth. It is too early to say whether the UK will experience a deep recession, but the BoE is likely to continue raising rates in an effort to combat inflation and expectations for those rates continue to increase. While the Pound has benefited from this news, there could be a noticeable pressure on stocks as the cost of money continues to rise and investors are left with less resources to allocate. In addition to this, there are several other factors which may influence the British economy including the outcome of the war in Ukraine, the pace of global economic growth, and the direction of commodity prices. 

A stagnating economy, cyclical headwinds and structural challenges bring to mind the early 2000s and call for a new reform agenda As Mark Twain is reported to have said, “History doesn't repeat itself, but it often rhymes.” Such is the case with the current economic situation in Germany, which looks eerily familiar to that of 20 years ago. Back then, the country was going through the five stages of grief, or, in an economic context, the five stages of change: denial, anger, bargaining, depression and acceptance. From being called ‘The sick man of the euro’ by The Economist in 1999 and early 2000s (which created an outcry of denial and anger) to endless discussions and TV debates (which revelled in melancholia and self-pity) to an eventual plan for structural reform in 2003 known as the 'Agenda 2010', introduced by then Chancellor Gerhard Schröder. It took several years before international media outlets were actually applauding the new German Wirtschaftswunder in the 2010s. It's hard to say which stage Germany is in currently. International competitiveness had already deteriorated before the pandemic but this deterioration has clearly gained further momentum in recent years. Supply chain frictions, the war in Ukraine and the energy crisis have exposed the structural weaknesses of Germany’s economic business model, and come on top of already weak digitalisation, crumbling infrastructure and demographic change. These structural challenges are not new but will continue to shape the country’s economic outlook, which is already looking troubled in the near term. Order books have thinned out since the war in Ukraine started, industrial production is still some 5% below pre-pandemic levels and exports are stuttering. The weaker-than-hoped-for rebound after the reopening in China together with a looming slowdown or even recession in the US, and the delayed impact of higher interest rates on real estate, construction and also the broader economy paint a picture of a stagnating economy. A third straight quarter of contraction can no longer be excluded for the second quarter. Even worse, the second half of the year hardly looks any better. Confidence indicators have worsened and hard data are going nowhere. We continue to expect the German economy to remain at a de facto standstill and to slightly shrink this year before staging a meagre growth rebound in 2024. Headline inflation to come down after the summer What gives us some hope is the fact that headline inflation should come down more significantly after the summer. Currently, inflation numbers are still blurred by one-off stimulus measures last year. Come September, headline inflation should start to come down quickly and core inflation should follow suit. While this gives consumers some relief, it will take until year-end at least before real wage growth turns positive again. At the same time, an increase in business insolvencies and a tentative worsening in the labour market could easily dent future wage demands and bring back job security as a first priority for employees and unions. In any case, don’t forget that dropping headline inflation is not the same as actual falling prices. The loss of purchasing power in the last few years has become structural. Fiscal and monetary austerity will extend economic stagnation With the economy on the edge of recession, the government’s decision to return to (almost) balanced fiscal budgets next year is a bold move. No doubt, after years of zero and sometimes even negative interest rates, Germany’s interest rate bill is increasing and there are good reasons to stick to fiscal sustainability in a country that will increasingly be affected by demographic change (and its fiscal impact). Nevertheless, the last 20 years have not really been a strong argument for pro-cyclical fiscal policies. With both fiscal and monetary policy becoming much more restrictive, the risk is high that the German stagnation will become unnecessarily long. Waiting for 'Agenda 2030' In the early 2000s, the trigger for Germany to move into the final stage of change management, 'acceptance' (and solutions), was record-high unemployment. The structural reforms implemented back then were, therefore, mainly aimed at the labour market. At the current juncture, it is hard to see this single trigger point. In fact, a protracted period of de facto stagnation without a severe recession may reduce the sense of urgency among decision-makers and suggests Germany could be stuck in the stages of denial, anger, bargaining and possibly depression for a long time. Two decades ago, it took almost four years for Germany to go through the five stages of change. We hope this time that history will not be repeated.   German economy in a nutshell (%YoY)  

Market rates are feeling the pressure. Risk assets have been bought into, and inflation is not calming fast enough. Central banks are piling further pressure on them. The US 10yr Treasury yield won't look right until it hits 4% and can take out the prior high. The 10yr Bund yield should get back to 2.75%, at least, and can still look up, possibly to about 3%   The journey for 10yr rates is back to March highs Market rates peaked in March this year. At the time, there was what looked like a relentless rise in rates underway, only to be undercut by the sudden and unexpected implosion of Silicon Valley Bank (SVB), with echoes in Europe as Credit Suisse was forced into a merger. There have been ripples of concern since, but apart from another few manageable banking causalities in the US, there has been a calming of nerves. In fact, we managed to morph from a state of material concern for the system to one of outright 'risk-on'. The coincident rise in market rates is an outcome of this. Plus there's sticky inflation in both Europe and the US (and beyond), and in the US an economy that just won’t lie down. So where now? On the one hand, forward-looking indicators are in a recessionary state, small bank vulnerabilities remain, and lending standards are tight. The eurozone has moved into a state of technical recession, and China is showing only a subdued reopening oomph. That, together with the cumulative effects of rate hikes already delivered, plus the negative real wage growth environment, should ultimately place material downward pressure on market rates as we progress through the second half of 2023. A peaking out for official rate hikes from both the Federal Reserve and the European Central Bank in the coming months would mark an important point in the cycle. From that point on, market rates should be on the decline, and yield curves should be in a dis-inversion mode. But we are not at that point just yet. The latest US core PCE number at 4.9% reminds us that the US is still a "5% inflation economy". We think this will change (inflation will ease lower), but for now, it is what it is until dis-proven. In the eurozone, there has been a material easing in inflation rates, but the headline reading is still high, at 5.5%. UK inflation seems to have stopped falling, but it is still close to 9%, requiring the Bank of England to re-accelerate hikes. In the US, the latest consumer confidence number for June popped back out to 109.7 (versus 100 at neutral). All of this places upward pressure on market rates, and these factors are likely to sustain the upward pressure, at least for as long as an underlying oomph factor remains in play.  

Disinflation continues across Central and Eastern Europe, opening up the possibility of central bank rate cuts. However, lower inflation does not necessarily mean faster rate cuts. The local story will increasingly create divergence across the region.   Poland: Central bank easing around the corner Second-quarter growth in Poland most likely underperformed (with flat or negative year-on-year growth), given poor retail sales, industrial output and a 45.1 point manufacturing PMI reading in June. Consumer sentiment is improving but from a very low level. Moreover, real wages will just start to grow in the third quarter, after around a year of declines. Plus, the government’s cheap mortgage scheme has only recently started, arriving too late to give a boost to housing construction this year. Net exports are to be a key GDP driver this year. We expect no policy changes from the National Bank of Poland in July. However, we estimate that the chances of a rate cut after the August Monetary Policy Council break have increased to 65-70%. This is following the guidance provided by some MPC members, including President Adam Glapinski, and the lower-than-expected June CPI print. We see more than one interest rate cut in 2023 as possible. Our short-term inflation forecast is optimistic, with CPI falling to single digits in August. Our long-term CPI forecasts are substantially far less favourable, however. Core inflation may stabilise around 5% year-on-year in 2024-25 given the tight labour market, the large rise in the minimum wage and the valorisation of 500+ child benefits. The zloty continues to benefit from a mix of the current account surplus, more FX sales on the market by the Ministry of Finance, inflows from foreign direct investment, and portfolio capital. Some investors seem to expect a more market-friendly political environment after the parliamentary elections. We expect all those factors to persist at least until the elections. We expect EUR/PLN to gradually sink to, or slightly below, 4.40 in the coming weeks. Despite higher overall 2023 borrowing needs after the state budget amendment, the government aims to finance them via the reduction of the sizeable cash buffer (PLN117bn as of the end of May) and FX funding, hence limiting Polish government bond (POLGBs) issuance compared to the initial budget bill. In tandem with the expectations for monetary policy easing, this suggests a further drop in yields across the curve and some tightening in asset swaps.    

According to the CME FedWatch tool, markets are currently seeing a ~74% probability that a hike will not take place at the Fed monetary policy committee meeting in June. In addition, expectations of future rate cuts closer to the end of 2023 and continued rate cuts through 2024 are increasing, further boosting investor sentiment, supporting valuations of technology companies, growth sectors in general and contributing to the upward trajectory of the market.   Lower inflation has also played a role in the positive market performance. Inflationary pressures continue to fall, allowing consumers to maintain their purchasing power and businesses to plan for the future with greater certainty, removing uncertainty about inflation. This favourable inflation environment has strengthened investor confidence in the resilience of the economy in the 2nd half of the year, given the expected policy shift from the Fed. Moreover, the US economy has demonstrated its resilience, continuing to show growth despite relatively high interest rate levels. Key economic indicators such as GDP growth, employment figures, labour market strength and consumer spending are showing signs of stability, indicating sustained and balanced economic growth. Expectations of a soft economic landing have allayed fears of a prolonged recession and laid a solid foundation for market recovery.