The ECB ready to maintain its accommodative policy in 2019

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The ECB puts all its energy on it but inflation does not converge frankly towards the objective (2%) it has defined. Can we say, like Mario Draghi, that the Quantitative Easing has worked properly?
Yes probably on the activity. The fall of all the interest rates has modified the inter-temporal trade-off on consumers’ side favoring the immediate expenses to the detriment of the future expenses.
On inflation? Yes, if the recovery helped to avoid deflation but beyond? We can wonder. Convergence towards the ECB’s target is postponed year after year.
Forecasts on growth (convergence towards potential in 2021 estimated at 1.5% by the ECB) and on inflation, suggest, except to change the reaction function, that the ECB will remain accommodative for a extended time.

Large US trade imbalance and the Fed’s tightening

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The US external trade is weakening rapidly. Its deficit has never been so important (measured in real terms and ex oil trade). Imports have a strong momentum. It reflects the White House fiscal strategy and it is done at the expense of American citizens. Not the good strategy. This large imbalance is also a good reason for the Fed to maintain its tightening bias in order to limit the domestic demand momentum. Powell has spoken many times of the non sustainable fiscal policy of the White House. This trade imbalance is just an illustration of it.

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The flattening of the yield curve and the possibility of a recession in the US.

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First step the 5yr-2yr spread is now null before being negative with the Fed tightening. Then the 10yr-2yr will flatten before being negative for the same reason. This has always been a signal of recession. This time is not different and 2020 can be anticipated for it.
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The two curves have the same pattern even if levels are different. They provide the same message for 2020.
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The ECB will be unable to normalize its monetary policy soon

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The ECB will not start the normalization of its monetary policy in 2019. The interest rate level will remain stable, my bet is that the refi rate and the deposit rate will remain at the current level in 2019.
The lack of external impulse, the slower momentum in the manufacturing sector and the convergence of the headline inflation rate to the core inflation rate are three reasons that suggest that the ECB will not take risks in the management of its monetary policy. The monetary policy normalization, even the expectation of it, may weaken economic activity. Therefore it’s not the good policy when the inflation rate is way below the ECB target with no convergence to the target in a foreseeable future.

The framework I have in mind is the following: Due to more heterogeneous behaviors and uncertainty at the political level, global growth will become, in 2019, weaker than in 2017 and in 2018. Inside the Euro Area, there are no coordinated policies that may boost growth, therefore growth trajectories will converge to potential growth. This framework is not a source of monetary policy normalization. But we can add that the dramatic oil price drop in recent weeks (due to excess supply in the US and in Arabia) will push the headline inflation rate to the core inflation rate which has been close to 1% for months. It’s still way below the ECB target and therefore not a source of monetary policy normalization.  Continue reading →

The slow transformation of the labor market in France

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The unemployment rate is stable in France in the third quarter. It stands at 8.8% for metropolitan France, as it was during spring and at 9.1% when overseas departments are included, again as it was in the second quarter. The pace of the unemployment rate is consistent with that of the economic cycle. Nevertheless, it reacts now a bit faster to the evolution of growth than before the 2008 crisis.
All the indicators suggest that growth is richer in jobs and that it regains some virtue with the increase in full-time work, the rise in fixed-term contracts and the decline in the share of fixed-term contracts.
The labor market is becoming more flexible and it is certainly a positive factor for the dynamics of employment. It is now necessary to improve the training component to further improve this phenomenon by enriching human capital. The aim is to bring down unemployment permanently and move towards full employment. The law passed last summer can contribute to it, it must now be implemented efficiently. Continue reading →

US jobs and manufacturing activity My Wednesday column

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This post is available in pdf format My Wedenesday Column – November 7

US job growth is buoyant, but is it all down to the Trump effect?
The US economy created 250,000 jobs in October, which is a bit higher than the average of 213,000 witnessed since the start of the year. However, October is usually a fairly good month for new job creation, with 271,000 in October 2017, and an average of 246,000 in the month of October since 2013 as compared to an average of 206,000 for other months.
The labor market is buoyant overall, reflecting a solid pace of economic growth although nothing to write home about with 2.25% per year on average since 2011.US jobs Continue reading →