No more samba in Brazil – My Tuesday column

This post is available in pdf format My Tuesday Column – 9 October 2018

Jair Bolsonaro has come out in the lead in the Brazilian presidential elections with 46%. Looking beyond his very divisive views on certain issues in Brazilian society (status for women, LGBT), on the Paris Agreement and the corruption of previous governments, along with his aim to end Brazil’s endemic violence by allowing Brazilians to take up arms, are there any economic foundations for his likely victory? (see here the Brazilian context of these elections)
This victory has very clear economic explanations. The Brazilian economy has been suffering since 2014 and the collapse in commodities prices. The recession over 2014-2015 and 2016 lasted a very long time, and was followed by a lackluster recovery, which was more of a stabilization than a real rebound. GDP in the second quarter of 2018 still fell 6% short of the 1Q 2014 figure.
This drastic situation can be attributed to two factors. The first is the country’s high dependency on commodities. Brazil enjoyed a very comfortable situation at the start of the current decade when China became its primary trading partner. Opportunities increased and commodities prices soared, so revenues were buoyant and did not encourage investment, creating a phenomenon known as Dutch disease, whereby commodities revenues were such that there was no incentive to invest in alternative businesses. But when Chinese growth began to slow and commodities prices took a nosedive, the Brazilian economy was unable to adapt, so it seized up and plunged into a severe recession.
The other factor is that Brazil devoted hefty financial resources to financing the football World Cup in 2014 and then the Olympic Games in 2016, so in a country with a massive current account deficit, this put a lot of pressure on financing. Funding for public infrastructure replaced investment in production, thereby making the country’s Dutch disease even worse.
The Brazilian population has paid a high price for the country’s brief moment of glory. 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

US, Japan UK, France – What to keep in mind on Tuesday

Five points to keep in mind

Minutes of the Federal Reserve
The good thing with the minutes of the last meeting of the Monetary Policy Committee of the Federal Reserve is that you can find what you want to find.
The main sentence to perceive this is the following “Members generally agreed that, before taking another step in removing monetary accommodation, it was prudent to accumulate more data in order to gauge the underlying momentum in the labor market and economic activity. A couple of members preferred also to wait for more evidence that inflation would rise to 2 percent on a sustained basis.Some other members anticipated that economic conditions would soon warrant taking another step in removing policy accommodation.(page 12)”
The first part tells that the FOMC is cautious but the end of the sentence tells that improvement in macrodata could lead to a new strategy.
The Fed is also very attentive to the international context forcing the US central bank to remain cautious “In addition, it was noted that the dollar is a principal reserve currency and that monetary transmission in the United States occurs through funding markets that are quite globally connected.(page 3)Continue reading

Benchmarks after a vacation period

After a vacation period we all need to look at economic indicators to refresh our perception of the economic outlook. I propose a series of graphs with rapid comments.

Point #1Growth momentum was low in France and in the US during the second quarter.
In France, GDP was marginally down during the second quarter (-0.04% flat and -0.2% at annual rate). In the US, it was up by only 0.3% (flat) (1.2% at annual rate).
For France, this sudden stop is linked to private demand. Its contribution during the first quarter was at 3.6% at annual rate. It was negative at -0.1% during spring. Households’ expenditures slumped with a contribution that was null in Q2 after +2.5% during the first three months of 2016. Corporate investment has had a negative contribution at -0.1% after +1.1% during the first quarter.
The government forecast for 2016 is at 1.5%. It is now an ambitious target as it will be necessary to have a growth number at 0.55% (2.2% at annual rate) during the third and the fourth quarters. We don’t see where this spike would come from. It can work during one quarter, as it was the case during the first quarter of this year, but we cannot expect, for the French economy, two consecutive quarters above its potential growth trend Continue reading

The importance of oil – My weekly Column

First graphA lower oil price will drive inflation rates down
With Iran back on the oil market, the price dropped below 30 dollars for a barrel. This could have an important impact on the inflation rate and therefore on monetary policy strategies in Europe and in the US.
The graph shows, for the Euro Area, the energy contribution to the inflation rate. It also shows the one year change of oil price (Brent) in euro. The two curves have consistent profiles.
With an oil price at 50 and the EURUSD exchange rate at 1.07 (red line), the oil price change is consistent with an energy contribution that could be close to 0 on average in 2016. It was a good hypothesis to put the price at 50. In that case, the headline inflation rate was able to converge to the core inflation rate. It was a comfortable situation for central bankers.
If on average, the oil price is 35 USD and 1.07 (green line), the contribution could be close to -0.6%. In that case, the inflation rate would be circa 0%. With 30 USD and 1.07 it would be probably negative.
These simple calculus show that the oil price trajectory will be important in 2016 (close to 30 or below?) and that there is no guarantee that inflation rates could converge to 2% in a finite time. Continue reading

My Macroeconomic column in 8 points: Will employment change the Fed’s strategy?

The main issue this week was the US employment figure as it may change the Fed’s mind on monetary policy. Nevertheless, employment is not the only aspect to mention to catch the US economy momentum. Another important issue, this week, is the rapid and deep drop of German industrial orders from outside the Euro Area. It’s a source of concern for the global investment dynamics. The last important point is the non-null probability of a rate lift-off at the Bank of England in 2016. Mark Carney has mentioned this possibility after the Monetary Policy Committee Meeting of the Bank. It’s not the first time that the BoE and Carney take this kind of commitment.

Eight points this week to follow the macroeconomic environment

1 – There was impatience to get the number of jobs creation in October in the US as it could be a trigger for a Fed’s rate move at its December meeting.
The number was strong at 271 000, way above expectations at 185 000. Nevertheless, the employment rate was almost unchanged for all classes of age and was unchanged for the 25-55 years of age. In other words, there were no supplementary pressures on the labor market even with employment surprising on the upside.
This figure comes after August and September during which the number of jobs creation was low. As a consequence, the average number of new jobs in the last 3 months is below the average of the 3 previous months: +187 000 in August, September and October versus 243 000 from May to July. Continue reading