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Monthly Archives: January 2019
Smart discussion with Olivier Blanchard
Macroeconomic topics in a very friendly discussion. Great macro
Why is the euro area slowing? My Weekly column
This post is available in pdf format My weekly column – January 15th
The euro area economy is slowing and could even see a contraction around the end of 2018 due to recessions in Germany and Italy, along with very weak momentum in France. The trend has changed at a faster pace than had been expected at the start of 2018, when the consensus was for similar trends to the very robust growth in 2017 i.e. no acceleration but continued swift economic growth. This pointed to expectations of more self-sustaining growth via jobs, income and investment, thereby driving a more independent trend that could safeguard some of the euro area’s economy against potential external shocks.
This quickening decline is worrying as the situation in a number of countries has gone from solid to shaky, for example Germany, where external trade is now hampering growth, along with Italy and France where domestic demand is no longer on the desired trend.
This quickening decline is worrying as the situation in a number of countries has gone from solid to shaky, for example Germany, where external trade is now hampering growth, along with Italy and France where domestic demand is no longer on the desired trend.
Why this perception of a swift deterioration in the euro area economy?
The first harbinger that all economic observers picked up on is the very swift deterioration in economic indices as measured by business leaders surveys. From a peak in the last quarter of 2017, the composite index slid swiftly and steadily right throughout 2018, failing to display a recovery. This trend is revealed in the euro area Markit manufacturing sector index, which slowed severely and sustainably in sync with world trade, with an accompanying drop in domestic and external orders.
Brexit – an unknown territory now
Theresa May’s defeat in the British Parliament is historic with a gap of 230 votes (432 votes against 202 against).
The text that was validated in November by the British government and the European Commission will not be the canvas of the new European architecture.
What can happen? We all have in mind a scheme with all the alternatives.
Beyond Plan B that Theresa May must present in three days and that she obviously does not have, the United Kingdom will enter the land unknown because there is no trivial solution.
The question is who will carry the British government because the general idea is that Theresa May has to leave. Indeed, can Theresa May still be credible after her terrible defeat? Will she have the will to stay as Prime Minister? What can she bring now when she has put all her strength into the battle?
We can imagine general elections but who will take the 10 Downing Street? Theresa May? A brexiter? Or Jeremy Corbyn? The first has a problem of credibility, while no brexiter wants power as long as the issue of Brexit is not settled and the British left does not wish Corbyn for this job because he is too extreme and probably too volatile. This raises the question of who could take responsibility for a second referendum.
One can imagine an extension of Article 50 but why? The EU will not move, and rightly so, and the British have already tried to negotiate the best deal for them. The only reason that pushes in this direction is the idea that in fine reason will prevail and that the British will renounce Brexit.
There remains the unilateral renunciation of the procedure which would be carried by Parliament or a Brexit without agreement.
The uncertainty remains and will not be resolved for long as Theresa May will probably cling to her position when she no longer has the hand
Message from French households: no future
For French households, the future has darkened during the last two months. The household confidence index plummeted in December and households’ perception of their own situation or that of all French people is at a very low level, not necessarily very different from that observed during the post-Lehman shock period. 2008/2009.
This is a measure of the feeling of what is happening in France today. The difference is that in 2008/2009 the shock was external and in a way it was enough to wait for the effects to fade.
Today the shock is endogenous, it has its source in the very dynamics of French society. When we look at the year-on-year change in the household confidence index, we can see that the shock is stronger than in the winter of 1995 when the French economy froze.
The consequence is that households can no longer project themselves into the future. The perception of their own situation is very degraded leading to a more wait-and-see attitude, leading to a deterioration of the economic situation, feeding a vicious circle.
To get out of it, the government must propose measures in rupture that could change very quickly everyone’s perspective to avoid dramatic political excesses. It is he who has the responsibility and it is certainly not by accentuating the tax burden that the solution will be found.
Eurozone recession?
The horizon darkens faster than expected in the Euro zone.
The German figures published this morning (January 8) suggest that the economy is heading towards recession (its GDP had already fallen in Q3). Italy, also with declining GDP in Q3, has negative signals via business surveys. It is also probably in a recession. The French economy lacks vigor, social unrest weighs heavily on the macro dynamics.
In other words, 65% of the Euro zone is probably in decline in the last quarter of 2018 (German and Italian declines do not make up for France’s slight rise). This creates a mediocre momentum and a real concern for the pace of growth of the area for the coming months.
In a context where inflation will be reduced, this will result in poor nominal growth that will not have the ability to create and distribute income. Better coordination of economic policy is a necessary condition (but probably not sufficient) to find a satisfactory trajectory.
Alas, we do not take that path. The two Italian deputy prime ministers blow on the French embers and do not encourage to imagine a serene future.
Germany in recession ?
Recent data on the German industrial production show a rapid drop in the economic activity. The quarterly change was already at -5.5% in the third quarter (annual rate). At the end of November, the carryover for the last quarter of 2018 is at -7.8%.
There is a strong consistency between the quarterly change in the industrial production index and the GDP as it is shown on the graph.
During the third quarter of 2018 the GDP was down -0.8% and related to the strong decrease in the German production this winter, the GDP may again shift downward in the last quarter. Germany would then be in recession.
The impact could be strong on the Euro Area’s momentum and leading to a downward revision of the EA growth forecast (the starting point for 2019 would be lower). The convergence to potential growth (1.6%) would then be quicker than expected.
The ECB will not change its monetary policy before long.
