France – GDP growth at 1.9% in 2017

The French GDP growth in 2017 has accelerated to 1.9% on average after 1.1% in 2016. The quarterly sequence of the GDP expansion was steady at 0.6% per quarter except 0.5% in the third quarter.
The carryover growth for 2018 at the end of 2017 is 0.9% which slightly higher than a year ago. At the end of 2016 it was at 0.4% for 2017. The effort that has to be done to converge to 2% in 2018 on average will be lower than in 2017. It is just a 0.42% increase per quarter (versus 0.58% in 2017).
The very positive part of the fourth quarter report was the strength of corporate investment.

The government budget for 2018 has been defined with a 1.7% growth (or 0.33% per quarter). This means that we can expect higher receipts compared to what was forecasted. The government credibility will be measured by its ability to use these extra receipts to reduce expenditures not to increase them. In the past these type of temporary receipts were systematically spent in permanent expenditures leading to a persistent budget deficit. We can expect a different strategy from the president Macron.

A reduction in expenditures and therefore lower demand would be consistent with what we currently perceive on the business cycle. A recent survey has shown that it was quite impossible for companies to increase their production. The production capacity utilization rate is at a peak, production bottlenecks are growing and there are difficulties in hiring.
With these constraints in mind, a boost in demand through higher government expenditures would be a mistake. The target is to reduce these constraints through incentives on investment (through public investment) and education. That will be the main government task in 2018.

The graph below shows that the current growth trend is slightly lower than before the 2008 crisis. It means that there will be no catching up and that the cost of the crisis is permanent. The gap between the current GDP level and the trend from 2000 to 2008 is -8%. The GDP level would have been 8% higher without the crisis. This is quite big and this gap will widen in coming years as I do not expect a catchup of growth.
FR-2017-Q4-GDPTrend.png

Davos, Trump, China and French growth – My Monday column

The world balance is changing under the influence of China as it seeks to establish a different path for globalization. America is trying to stage a response at Davos with the White House realizing that America needs its partners in order to be great again. Meanwhile, French growth is running into physical obstacles: the 2% trend is a peak, at least in the short term. 

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We saw a surprising development in Davos last week when the US President backtracked on world trade and his global economy model, as the White House indicated that it no longer sees the economy as a zero-sum game, contrary to its stance so far. Continue reading

A Worldwide Dilemma For 2018: Retreating Inward or Joining Forces?

Which side will win out in the current confrontation playing out across the world? The inward-looking attitude that has been so widespread these past months aims at taking power back locally. Meanwhile, the more cooperative approach involves joining forces to address global challenges and is based on continued dialogue. The choice between these two world views will be the key challenge for 2018.
The world is no longer quite so unanimous in its enthusiasm for globalization.

The cooperative dynamics we saw before the 2008 crisis are no longer the dominant force, and this shift was laid bare during the various elections and the referendums of recent times, as globalization and its cooperative approach did not lead to even distribution of wealth, particularly in developed countries. Branko Milanovic’s famous elephant curve was often held up as an example to demonstrate that the most badly off workers in the western countries had paid the price of globalization and swift growth in emerging countries, such as China and India. Continue reading

Shutdown and oil prices – My Monday column

The US administration’s partial shutdown marks a first in the country’s history: this is the first time that we have witnessed this type of situation when the same party occupies both the White House and Congress. It was somewhat different during Barack Obama’s presidency in 2013, as Congress was not in Democrat hands, and looking further back, President Jimmy Carter came up against difficulties in financing his budget with his Democrat majority at the end of the 1970s, but there was no shutdown.

 This failure for President Trump and Congress to get along has been the hallmark of the current Republican administration’s first year. The power dynamics between the two institutions ends up creating a puzzling sort of inefficiency. The disagreement of the moment is on the Deferred Action for Childhood Arrivals program, which involves young foreign-born individuals who arrived in the US as children. It turns out that Trump is in favor of a law to welcome them in the end, but the Republicans are unhappy with a bill partly drafted with Democrat agreement. This is a power struggle and not a cooperative political relationship between the President and Congress.

We had already witnessed this dysfunctional situation during attempts to repeal Obamacare, when Congress rejected Trump’s proposals. Continue reading

ECB, Monetary Policy and Germany – My Monday column

Mario Draghi’s stance is guarded. His latest press conference gave no indication of the change in communication tone that we are set to see from the European Central Bank in January.
The ECB is finally taking on board the strength of the economic cycle and so its communication stance must adapt to this shift. This is rather good news, as the central bank constantly appeared to be acting in reaction to an environment that could swiftly deteriorate, and this shift can bolster our confidence in the strength and length of the economic cycle. The other point noted by the ECB is the move away from an exclusively inflation-based focus and towards a more broad-based communication tone. This implicitly means that the ECB is extending its reach, but really when it comes down to it, this was already the case: the ECB’s intervention has hinged on the economic cycle rather than inflation since the euro was adopted in 1999. The chart below shows the Markit composite index and the difference in the ECB main refinancing rate over 5 months, and reveals that changes in the second indicator are clearly dictated by changes in the economic cycle, rather than in inflation.

The ECB is picking up its old habits from before the 2007 crisis. Continue reading

2018 – Strong expectations in a world that has changed

The year ahead gives us a number of reasons to be optimistic that I would like to share with you. World trade has taken an upturn, oil prices remain reasonable, and business leaders worldwide have a positive take on their environment. So the starting point for 2018 is solid.

Growth, along with the ensuing employment, will provide an opportunity for all citizens to regain a foothold in a complex and difficult world. Economic policymakers will be responsible for adopting the right reforms to set the stage for a recovery that provides enhanced job creation and reduces uncertainty for each and every member of society. In this respect, France has high hopes on the reforms that will be debated in 2018: the reform to vocational training and job skills lies at the heart of the French government’s roadmap and the policies the authorities adopt in this area will provide the key counterpart to the labor law decrees in making the job market more efficient. Continue reading