Video – Hélène Rey on “From Credit Boom to Systemic Bust”
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Turkey – On the way to a persistent crisis
The sell-off on the Turkish lira continues. The exchange rate against the dollar was above seven (7.2 in Asia) last night, it it now at 6.85 (just before 0400 pm, Paris time today) while it was at just 5.15 a week ago.
The graph is impressive and shows that the situation has dramatically changed in recent days.
On Turkey there are many things to look at to understand the recent weakness.
1 – In many other emerging countries, the situation has changed in April when the US dollar went up as expectations on the Fed’s monetary policy changed. Emerging currencies became weaker.
2 – The direct consequence was capital outflows from emerging to the US and lower liquidity on fixed income markets. In many emerging countries interest rates, short and long, went up rapidly. I have written on this topic here and here.
3 – The story stopped there in many countries notably in Asia. The situation is less comfortable but manageable. For countries with deficit in the current account and large indebtedness in dollar the situation went worse. This was notably the case for Turkey but also for other countries like Argentina or Indonesia. I have written on Turkey here and here
In other words, the Turkish lira weakness seen after mid-April was just the result of a stronger dollar leading to an emerging crisis. The specific Turkish momentum came from large disequilibria (current account and dollar indebtedness) that reflect the economic policy of recent years.
The recent exchange rate profile came after tensions with the US but the currency was already weak for reasons explained above. Tensions have created a run, leading to a rapid depreciation. Continue reading
Video – Change in monetary policies
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No real improvement in the UK after GDP figures
The UK GDP growth was at +0.4% during the second quarter (1.5% at annual rate). The carry over growth for 2018 at the end of the second quarter is 1%.
I have updated my graph on the deviation from the pre-referendum trend. There is no catch up while Eurozone countries are still above the trend. The impoverishment of the United Kingdom after the referendum continues. Not sure it was a good idea for the Bank o England to increase its main rate this month. The increased uncertainty on the Brexit negotiation will not allow a rapid reversal as uncertainty is the main enemy of long term investments, those which improve productivity.
The monetary policy procyclicality: a new source of concern
Central bankers are progressively adopting a pro-cyclical behavior. The global growth momentum is now lower and central banks’ strategy now have a restrictive bias. In the US, Canada, UK and in many emerging markets, central banks’ rates are higher than at the beginning of the year. This has already changed expectations and it will continue with a downside risk on the economic activity.
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The Fed’s strategy, the dollar and the emerging markets
The Fed’s meeting today is an opportunity to show the dramatic monetary policy divergence between the US central bank and the ECB and the risk for a stronger greenback.
The first graph shows the gap between monetary policies’ expectations in the two countries. The measure here is the 2 year rate in 1 year. The time scale begins with the Euro Area inception in 1999.
The divergence between the two central banks’ strategy has never been so important. It’s a strong support for the US dollar which will continue to appreciate and it’s a source of risks for emerging countries. The strong probability of a US tighter monetary policy in a foreseeable future will support capital outflows reducing liquidity on these markets. 
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France: Growth was disappointing in Q2
The Q2 growth number for the second quarter was disappointing in France. It was just 0,158% (non annualized) which is rounded at 0,2%. It’s the same figure than in Q1 (0,153%).
Carryover growth is just 1.3% for 2018 at the end of the second quarter. The government growth target in the 2018 budget is 1.7%. This is attainable if growth is at 0.55% in Q3 and in Q4. We can’t imagine the reason of this stronger momentum during the second half of 2018.
Households consumption is the weakness of the French growth since the beginning of the year. Change in the purchasing power was negative in Q1 for fiscal reason (higher taxes) and was probably negative also in Q2 due to a higher inflation rate. Corporate investment was higher in Q2 (good news) after a very weak number in Q1.
For 2018 we can expect a growth figure close to 1.5% which will be way below the 2.3% seen in 2017.
This mean that the public deficit target at 2.3% of GDP will not be reached. It will remain close to its 2017 level at 2.6%.
