The new government is expected to give a new breath to French economic policy. Manuel Valls the new prime minister will give a speech tomorrow at the National Assembly and we can expect that he give economic policy targets and how to reach them.
At the same time, Michel Sapin the new finance minister will have to negotiate with the European Commission the budget deficit trajectory. It was expected at 4.1% in 2013 but it will be at 4.3%. The target for 2015 is 3% and is probably not reachable. There are still discussions on the “Pacte de Responsabilité” that was announced by Francois Hollande during its press conference on January the 14th. This “pacte” will reduce payrolls tax. There are still discussions on the definition of the “pacte” and on who will finance this charge reduction? It will probably be financed by a reduction on government expenditures by EUR 50bn but the negotiation is not over yet.
On these issues, a macroeconomic point of view can improve the understanding of the situation. The two charts below will help.
In the long run, GDP profile is conditioned by private demand. Continue reading
Mario Draghi and the unanimity of the members of the Monetary Policy Committee of the ECB are ready to deeply change their point of view and to adopt unconventional policies. This is the point to remember of the press conference on April 3.
This means a particular interpretation which is that members of the Monetary Policy Committee of the European Central Bank consider that with a benchmark rate at 0.25 %, the policy is probably restrictive. The innovation is there. Monetary policy in the Eurozone faces the constraint of non-negativity of interest rates (ZLB Zero Lower Bound) and the need for other instruments to be more accommodative.
Mario Draghi said it clearly:
With the current monetary policy, risks are still on lower activity and are also on an inflation rate permanently below the target of 2 % and even below the path that was defined in March 2014.
So there is 3 points to remember in the words of Mario Draghi Continue reading
Will the ECB take into account the risk of deflation that each investor has in mind today? It is on this question that the ECB is expected at its meeting this day.
So far, the central bank has not wanted to go in this game, indicating that inflation would remain low for a long time and the deflation risk would keep very low. This is about the last Draghi press conference. However this is only moderately reassuring because the expected inflation in 2016 is only 1.5 % well below the 2% target. In addition, despite the reassuring figures projections of the ECB, it cannot be excluded that, in the meantime, price change could tangent deflation.
In addition, a strong call from Draghi is desired because many statements caused confusion on the perception that may have European central bankers on this issue. On this point, everyone has retained what Jens Weidmann, the head of the Bundesbank, said on the risk of deflation and the possibility of dealing with it with a sort of QE .
What analysis can be done of the risk of deflation?
For me there are three elements to consider Continue reading
On April the 1st, the Japanese VAT rate will raise by 3%, from 5 to 8%. Economic activity will slow down, during the 2nd quarter, in response to this negative shock. Households whose expenditures have not been very dynamic in February (-1.5%) will probably be stronger in March before an expected large drop in April with the new VAT rate.
Three issues have to be taken into account to understand the situation Continue reading
The inflation rate in the Euro Area was at 0.5% in March. Except during the period with high volatility in oil price, in 2008/2009, the yearly change of the consumption price index has not been so low.
The chart below shows statistics of the inflation rate since its inception. I’ve also shown the core inflation rate which also close to its historical low.
Of course there is a fear of deflation but that’s not as simple as that.
Two remarks: Continue reading