The monetary policy procyclicality: a new source of concern

Central bankers are progressively adopting a pro-cyclical behavior. The global growth momentum is now lower and central banks’ strategy now have a restrictive bias. In the US, Canada, UK and in many emerging markets, central banks’ rates are higher than at the beginning of the year. This has already changed expectations and it will continue with a downside risk on the economic activity.
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A Lower World Trade Momentum

These two graphs this morning in the “Daily Shot” of the Wall Street Journal show the lower world trade momentum. All the indicators converge to a lower dynamics. With US tariffs and retaliation the risk is an extended downward trend.

The virtuous loop seen in 2017 between trade and activity had an impulse coming from very accommodative monetary policies all around the world. There is no new central bankers’ impulse. It is even the contrary. Investors now expect that the next trend will be on the tighter side after the Fed.
Moreover the uncertainty associated with the lower global economic mood (from non cooperative strategies from the US, UK, Italy and retaliation measures) reduces the economic horizon and therefore the will to invest from corporate companies.

In other words, after a surge in 2017 coming from central banks’ impulse, there is a downside adjustment which is amplified by non cooperative behavior from many governments.
The main risk at the global level is a rapid growth slowdown. It could be sooner than later.

Euro Area – Growth Momentum is still on the up side

Corporate surveys in November show that the pace of growth is still accelerating in the Euro Area. This can be seen at the global level but also in every sector, notably in the manufacturing sector where the stronger momentum is consistent with a higher international trade dynamics. Surveys also show that employment is increasing rapidly and that nominal pressures remain limited.
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Euro Area – Robust Dynamics in August according to Markit

Synthetic indices on economic activity stabilized in August according to the Markit Survey that was out this morning. These figures are consistent with a 0.5/0.6% GDP growth for the third quarter (non annualized figures).
The employment momentum is still robust but doesn’t accelerate anymore. But the business cycle is still virtuous with a strong momentum in the manufacturing sector. The survey price index stabilized in August. The ECB can maintain its accommodative bias on its monetary policy. The more expansive euro has not yet influenced companies’ behavior.

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