Growth: the Gallic village resists

INSEE, the French statistical institute published its new forecasts for the first half of this year. (Its forecasts are just for a semester to avoid being in conflict with the government expectations). Activity would increase by 0.4% in the first and second quarters (non annualized rate). INSEE slightly revised up its second-quarter figure.
The carryover growth for 2019 would thus be 1.1% at the end of the first half. To reach the new government forecast at 1.4% (indicated by Bruno Le Maire while the budget for 2019 had a forecast at 1.7%), quarterly growth has to be at 0.4% for each quarter. The current trend for the first semester would therefore be extended to the whole year. This figure, 1.4%, is also the one recently published by the Banque de France.

The articulation of the INSEE forecast is based on two elements.

The first is the rebound in domestic demand in the first months of 2019. On this point, all experts agree. The measures that have been taken on purchasing power should be support for household consumption. The pace of growth of this one would thus pass from an average figure per quarter of 0.125% in 2018 to 0.5% in the first quarter and 0.4% in the second. (Measures to boost the purchasing power have been taken after yellow vests’ protests. The amount of these measure is around Eur 11bn)

The second element of the framework drawn by INSEE is the momentum associated with the international environment. The Institute considers that the slowdown seen at the end of 2018 is just temporary and that the situation will rapidly improve to regain a more robust outlook. The demand’s profile to France from the rest of the world is unchanged from the INSEE’s December economic outlook. And this is a fairly solid figure, rising 0.7% in the first quarter and 0.9% in the second, while the average figure for 2018 was 0.5% per quarter.

If the strong slowdown of the last quarter, which conditioned the strong downward revision of the OECD forecasts (from 1.8% to 1% for the Euro zone) and the ECB (from 1.7% to 1%), is reversed then the outlook may be robust in coming months.
Such a conjecture implies a rather robust pace for exports as world trade regains a stronger track. It also implies a rebound in business investment, as expected demand would recover. In that case, a strong recovery can be expected as companies’ financial situation will improve dramatically in 2019 (Lower taxes which was a policy proposed by Hollande in 2013 will be replace in the future by lower charges on wages. But in 2019 both measures are available as the new measure will be put in place and the former has a one year lag. This is a opportunity for firms. They will take advantage of that if expected demand improves dramatically).

If the global shock is persistent then the pace of exports will be less sustained and the investment will be gloomier. The improvement of financial conditions are only permissive conditions but not decisive when the expected demand is mediocre.
The pace of employment will also be conditioned by the persistence or not of the shock.

If one assumes a more persistent shock from the rest of the world then the figures are less robust beyond the jump of the first quarter and without being catastrophic growth would tend to 1.1- 1.2% on average for 2019. And this does not suggest necessarily a re-acceleration of growth in 2020 as suggested by the Banque de France.

The key element will therefore be the overall momentum beyond the short-term effects of government measures. The Fed, the OECD and the ECB are wondering about the pace that this global dynamic can have. The Fed no longer wants to make commitments (on the pace of interest rates and on the reduction of its balance sheet) in order to be able to respond to a possible global shock without having hands tied. But France resists this mood.

In the first months of 2019, the economic situation will largely depend on domestic demand and therefore the measures taken by the government on purchasing power. An immediate consequence is that the government will not be able to engage in a policy of reducing public spending which is a precondition for a credible reduction in taxation. An expenditure reduction policy would annihilate support measures. The public deficit will therefore remain high, probably at best around 3.5% in 2019.

Huawei vs America

Look at this map. Who then can expect a trade deal between China and the USl The real question is about techno leadership? Huawei has a step ahead of the US.

The Chinese company already has deep discussions with many countries throughout the world. From Asia to Europe, Africa and Latin America the Chinese web is already impressive. On the other side, the US has forbidden purchases of infrastructures coming from Huawei. Australia, New Zélande, Japan and Taiwan follow the same rule. But it is a minority.

Recently, the US has generate pressure on Germany to forbid the German to buy Huawei products in the renewal of their mobile network. Germany has not changed its mind and has allowed Huawei to compete.
The balance of strength at the global level may change rapidly at the expense of the US.

How to expect an agreement that would validate the dominance of one over the other? From China to the US?

Another moment, Mr. Executioner

The British parliament is undecided. The vote on the possibility of a no deal is very divided. 321 against a no deal but 278 in favor of a lack of agreement to go out. Almost half of the parliamentarians wants a brutal exit from the EU.
The idea, supported by many commentators, that it would be enough to abandon the exit procedure because it is not popular is false.
What is interesting is that the parliament was very much in favor of the “remain” just after the referendum. It has evolved a lot. This is why a second referendum is in no way a guarantee of a “good vote”.
This is the lesson of last night’s vote (Wednesday).

Next step tonight with the vote on the deadline request. It can not run after the start of the next European semester, otherwise the English will have to vote in the elections for the European Parliament.
But from now to the end of June, what can we expect again?
And will the Commission and the European governments validate this extension for not much?
This possible postponement is reminiscent of Madame du Barry asking the executioner December 8, 1793 “One more time Mr. Executioner”. We know that the outcome was fatal.

Euro area growth projections downgraded, and policy mix still restrictive – My weekly column

The OECD and the ECB have downgraded their 2019 growth projections for the euro area in quick succession, with the OECD now expecting 1% for the year ahead vs. 1.8% previously, and the European Central Bank projecting 1.1% vs. 1.7% in December, putting euro area growth below its potential pace.
The main reason for this rapid slowdown of the activity lies in the rapid deceleration of world trade, particularly in its Asian component. The White House policy is a key explanation of this trend change. This external shock profoundly modifies the equilibrium of the euro zone economy.

The OECD believes that the economy in the bloc has now become a source of concern for the world economy as a whole. Beyond the euro area’s actual situation, a slowdown in the zone along with a sharp and swift downgrade to growth projections for 2019 also make for a shock on world growth. The area is a major contributor to world trade momentum, so a drastic slowdown is an additional source of concern for the world economy.
It is worrying that the euro area is so large, but yet it is still at the mercy of international events with little capacity to react to them clearly. It was buoyed by strengthening trade in 2017 but was dented by the recent negative shock, and its inability to absorb these tremors is alarming for the world as a whole and not just the European economy.

This situation reflects the fact that the area has become more and more open to outside influences, while for example the United States’ exposure to trade with the rest of the world has remained steady over time. Germany plays a major role in this trend, as shown by the chart, while Italy and France are similar in terms of how open their economies are to trade with outside countries (the OECD suggests that Italy has a greater dependence on world trade than France. This is excessive (see the graph). But this is the main explanation of the more robust growth in France according to the OECD (sic)).

The most surprising aspect during the current downgrades to growth projections is that this swift drop reflects the dearth of economic policy to cushion the shock.

The policy mix – i.e. the way fiscal policy and monetary policy work together – is restrictive. Financial conditions are admittedly encouraging as a result of the ECB’s accommodation, but fiscal policy has been restrictive for too long and is not propping up economic activity, meaning that the shock from the world economy is in no way cushioned by euro area economic policy.

The chart shows the primary budget balance (excluding interest payments) adjusted for the economic cycle and expressed as a % of potential GDP. This figure is an indication of how restrictive fiscal policy is, and in the euro area the balance is positive, pointing to restrictive policy.

For the British, the hardest starts.

The main consequence of Tuesday’s British parliamentary vote is that Theresa May is now out of the game. The power is now in parliament and the European Commission.

The vote tonight (Wednesday) is about whether or not to choose a no deal. If the no deal is chosen by the parliamentarians then the British will leave without EU agreement on March 29th.

If the no deal is not voted, a third vote will be held Thursday on the possibility of a postponement of the exit date. But if May discusses this point with the European Commission it is this one that will accept or not this postponement. As suggested by the spokesperson of the commission, such a extension will only make sense if it allows a progress and a change of perspective.

A 3 months postponement, a delay often mentioned, is probably useless. Theresa May will remain prime minister but she has already exhausted all her resources.

The no deal is gaining ground every day.

The worst for the British would be a resignation from May and the call for general elections. The risk would be an institutional mayhem since a majority would be difficult to find and a prime minister too. A second referendum may take place only at this stage. It will take a long time and may add a supplementary mayhem.

For the British, the hardest starts.

American pressure: the issue is the possible use of Chinese 5G by the Germans

Tensions between China and the US are about technological leadership. The Chinese, whose technological catch-up has been rapid in recent decades, is now rather ahead of 5G and Artificial Intelligence. The US does not accept, rightly, this change of equilibrium.
The standoff will continue and I can not imagine a quick trade agreement because it would assume that one of the two countries accepts the leadership of the other. This seems totally illusory and that is why the global environment will remain volatile.
The US is pressuring its allies to limit Chinese influence.
To be convinced, read this article of the Wall Street Journal published this afternoon (March 11). It indicates the pressure of the Americans on the Germans in the adoption of a Chinese 5G technology for the renewal of their mobile network.

The article “Drop Huawei or See Intelligence Sharing Pared Back, U.S. Tells Germany” is available here 
Here is the first paragraph 
“BERLIN—The Trump administration has told the German government it would limit the intelligence it shares with German security agencies if Berlin allows Huawei Technologies Co. to build Germany’s next-generation mobile-internet infrastructure.”….