Monthly Archives: September 2018

Italy: Growth expectations are too optimistic

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Here is the frightening part of the Italian budget: growth figures. In an interview Giovanni Tria said that growth forecasts for 2019 and 2020 were 1.6% and 1.7% respectively.

These are unbelievable expectations. Such numbers were attained only in period of global euphoria (2006) or of global recovery (2010). This will not be the case in 2019 or 2020. The Italian GDP growth trend is just 1.1%. That’s why budget numbers are at risks.

We cannot bet on a 2.4% budget deficit in 2019, 2020 and 2021. We must have lower growth figures in mind and probably higher expenditures. The situation is at risk in Italy In other words, the reduction of the public debt (reduction of the public debt to GDP ratio by 1% every year ) will not be achieved.

https://www.bloomberg.com/news/articles/2018-09-30/italy-s-tria-tells-il-sole-he-never-threatened-to-resign

Seven points on Italian budget announcement risks

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The Italian budget program, which sets out a budget deficit of 2.4% of GDP for 2019, 2020 and 2021, did not go down very well with investors. Uncertainty on Italy is making a comeback and the yield on the 10-year government bond rose sharply as shown by the chart below (as at 15.00pm CET today).

IMG_3776 (002).PNG
Source: Bloomberg

So just what are investors worried about? Continue reading →

The Federal Reserve has increased its rate by 25bp and will continue to tighten in 2019

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The Federal Reserve raised its benchmark interest rate by 25 basis points. The effective rate will evolve in a corridor between 2% and 2.25%.
The dots graph reflecting monetary policy committee members’ expectations suggests 3 rate increases in 2019, 1 in 2020 and none in 2021.
This profile, for 2019 and 2020, is unchanged from last June forecasts. The introduction of 2021, an additional year, nevertheless shows the end of the monetary tightening. It is set a final point to hardening with a slightly higher interest rate than long-term anticipation. The Fed’s rate would then evolve in a corridor ranging from 3.25% to 3.5% against a long-term equilibrium rate of 3%. The Fed needs to move above the latter to be restrictive and avoid the formation of imbalances that could harm the economy.

The press release is identical for the most part to that of June (see here the comparison). The changing part is important, however, since the Fed no longer refers to the accommodative nature of its monetary policy. It is now close to neutrality. Continue reading →

The Fed will stay on the path to higher rates in 2019 – My Monday column

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This post is available in pdf format Federal Reserve – My monday Column

The Federal Reserve meets on September 25 and 26, and a 25bps hike to the fed funds rate is expected, putting the effective rate in a range of between 2% and 2.25%, with another hike expected in December. The Fed now seems to agree on these four monetary tightening moves for 2018, so the next big question is 2019. During the latest update of economic and financial projections from the members of the Federal Open Markets Committee (FOMC) in June, three interest rate hikes were expected in 2019. How can we get a clearer idea of what’s to come?
Four interest rates are now confirmed by the Fed. I had mentioned this scenario at the start of the year due to the White House’s implementation of expansionary fiscal policy and I have not changed my mind: the hike to the fed funds rate is just a way to iron out the imbalances caused by this policy that seeks to fuel domestic demand.

This domestic momentum reflects the impact of two factors: the first is the direct effect of tax cuts and rising public spending, and we can see the positive effects of this twofold approach for demand; the other component is trade policy that aims to use domestic production to replace imports, thereby sharply driving up demand for companies’ goods and services.
So the White House has adopted a two-pronged approach: on the one hand it bolsters domestic demand and the other it directs this additional demand towards US companies rather than imports.
This internal momentum will have at least two direct consequences: the first is the risk of inflation because demand is strong and because of higher import duties. Continue reading →

Ten Years on – my Monday Column

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A pdf version of this post is available Ten Years on – my Monday Column

On September 15, 2008, the collapse of Lehman brothers set off a shockwave that rippled out right across the world economy. What can we make of this watershed moment 10 years down the line?
The extent and duration of the shock that hit the world economy are still impressive even 10 years later. Some observers had anticipated the property market’s role in triggering the upheaval, but no-one had envisaged the intensity of the shock or how long it would last.
Between the end of Spring 2007 and Fall 2008, the financial system crumbled astoundingly quickly and astonishingly easily, to an extent that remains unbelievable still to this day. The collapse of Lehman Brothers was the culmination point, coming in the wake of other investment banks’ demise – although these previous casualties had been rescued and taken over by other financial institutions – and its bankruptcy was accepted without taking the full measure of the consequences. It was a step into the unknown, and enough to strike fear into the heart of any economist at the time. Risks quickly emerged as insurer AIG was saved just a few weeks later: Lehman marked the final stage in the breakdown process, as the realization dawned that history was on the brink of a new era. Continue reading →

French growth and employment: A comparison with the Euro Area

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The French government is currently scaling down its growth forecast for 2018. In the initial budget the expected growth rate was 1.7% but was upgraded at 2% in April before being scaled down to 1.7%. Bruno Le Maire the French minister of the Economy and Finance also announced yesterday that the public deficit was expected to be wider in 2018 and 2019. He crosses fingers to maintain it below 3% of the GDP in 2019. For 2018, the deficit is now forecast at 2.6% vs 2.3% expected in April.
The French growth story this year is interesting. During the first two quarters the growth number was only at 0.16% on average compared to 0.69% on average for 2017 (all the figures are non annualized). This is a division by more than 4. It’s a kind of sudden stop.  Continue reading →