Economic Weekly: Views from Paris

The complete document in pdf format is available here
Economic Weekly-NatixisAM-02-16-2015

Key element of the week starting February 9

The major point this week was on GDP growth in the Euro Area.
GDP was up by 0.3% (1.4% at annual rate (AR)) for the last quarter of 2014. For the whole year, growth was 0.9% and carry-over for 2015 at the end of 2014 is 0.35%

There are four groups of countries plus Greece. The first one contains countries where the level of activity is above the pre-crisis level: Germany, Belgium, Austria and France. German growth was +0.7% in the 4th quarter (2.8% AR) and 1.6% in 2014. In France, GDP was up by 0.1% (0.3% AR) in the fourth quarter and 0.4% for 2014. In Belgium growth was +0.1% (0.4% AR) and +1% for 2014 and in Austria numbers were +0.1% (0.4% AR) and 0.3% for 2014.
The Euro Area and Netherlands are in a catch-up zone, below the GDP pre-crisis level. In the Netherlands, GDP was up by 0.5% in the last quarter of 2014 (2% AR) and 0.8% for 2014.
In Spain and Portugal, the rebound is spectacular. GDP was up 0.7% (2.8%AR) and 0.5% (2% AR) respectively in the fourth quarter and 1.4% and 0.9% for 2014.
The Spanish GDP level is now above Finnish GDP regarding the pre-crisis level as a reference. Finland is in its third year of recession.
The fourth group is for Italy where GDP growth was 0% in the fourth quarter and -0.4% for 2014.
Greece is outside the classification as it GDP is down by more than 25% compared to the pre-crisis level. In the fourth quarter GDP was down by -0.2% (-0.8% AR) but for the whole year and for the first time since 2007 growth was positive at 1%
ea-2014-q4-gdpOther Important Issues
The other important point is what has happened in Sweden where the Central Bank has pushed down its repo rate into negative territory at -0.1%. The Riksbank has explained its move by the long lasting deflation seen in Sweden. Beside this measure and to fight it the Bank has announced that it will purchase government bonds for SEK 10bn.
In fact, Sweden as Denmark and Switzerland are constrained by the ECB strategy to keep its interest rates at the Zero Lower bound for an extended period. These countries must avoid an appreciation of their currency and must adopt a very accommodative monetary strategy
Mark Carney the Bank of England Governor said that interest rates could converge to 0 as the inflation rate will turn negative in 2015. He is persuaded that the next move will be a liftoff but….. A negative inflation rate and weak core inflation can change landmarks.
Retail sales were down by -0.8% in the USA in January. A lower gas price is an important explanation of this drop. Ex gasoline, retail sales change was 0%. Without auto sales and gas, core retail sales were up by 0.2%. It’s low but not alarming.
The Chinese inflation rate is trending downward to 0.8% in January from 1.5% in December. There is a role for lower energy prices but internal demand doesn’t create pressures and that’s worrisome
— The Japanese GDP was up by 0.6% (2.2% AR) in the fourth quarter. In 2014 GDP growth was null
— The industrial production index was stable in December for the Euro area and up by 1% (at AR) for the last quarter. In France, industrial production was up by 1.5% in December but down by -1.75% in Q4
— In Greece, the February 11 meeting was a failure as was the next meeting the 16, next Friday 20

What will happen this coming week?
— First surveys for February with the ZEW in Germany (Tuesday) and the flash estimate for the Markit survey in China, Japan, Euro Area, Germany, France and the USA (Friday)
— Inflation rate in France – It will drop in negative territory (Thursday)
— Inflation (Tuesday), employment (Wednesday), retail sales (Thursday) in the United Kingdom
— Industrial production and housing starts in the USA (Wednesday)

Economic Weekly – Views from Paris

The document is available here Economic Weekly-NatixisAM-02-09-2015

Key element of the week starting February 2
US employment has increased a lot during the last three months. The number of jobs creation was strong in January (+257 000) and the upward revisions in November and December were significant. This can be seen on the graph below.

The report was full of details that show a real improvement in the labor market
The first is the change in regime since last April. It continues in January 2015 and reflects stronger numbers since April. The second point is the strong inflow on the labor market from people who were out of the market. This means that the labor market attractiveness has dramatically changed. This is a positive signal.
On another point of view the employment rate for people between 25 and 55 years of age is improving rapidly. These people have had a succession of negative shocks. Employment has dropped rapidly in this tranche of age. Step by step they are coming back on the market. The “25-55” employment rate is now at 77.2%. It is still 2.8% below the business cycle peak in January 2008.
That’s a situation I was expecting in order to have a real perception that the situation is converging to a more normal trajectory. The fact that people are back to the labor market is the main reason to explain the marginal increase of the unemployment rate. With this in mind, this is a good signal.
But the trajectory is still far from its long-term equilibrium and that’s why there are no pressures on wages yet. The average wage rate grows at the reduced pace of 2.2%.
usa-2015-january-employment Other Important Issues

  • The situation in Greece is still fragile. Last week trips to visit European governments have not been a real success. They still have to convince that a switch between the current situation which expired on February the 28th and a new contract will be profitable for everyone. Alexis Tsipras speech late on Sunday the 8th is still close to Syriza program. On Wednesday the 11th for the Eurogroup and the 12th with the heads of government, Varoufakis then Tsipras will have to find support. A failure would drive to increasing the probability of a Euro Area collapse. (more in the document)
    The ECB has changed the refinancing conditions for Greek banks. Government bonds and bonds with the government guarantee will not be eligible anymore. The ELA instrument will be available but be more expensive than the usual procedure.
  • PMI indices were almost stable in January for the manufacturing sector in developed countries. Nevertheless, the US ISM dropped for the manufacturing sector; probably the impact of a low oil price.
  • Composite indices in the USA and the Euro Area were stable for the first and improving for the second.
  • In these surveys, emerging countries are still weak. China is below 50 and Russia in recession
  • Strong improvement in retail sales for the Euro Area in the fourth quarter (strongest since Q4 2006).
  • For the whole year the US inflation rate was just 1.3% for the headline and 1.4% for the core measure. Far from the 2% target for the preferred Fed’s target.
  • Due to poor growth prospects and to low expectations on commodity prices, the Reserve Bank of Australia has reduced its interest rate by 25 bp to 2.25%
  • Industrial production was up in Germany for the 4th quarter (2.5% after -1% in Q3) – + 1.3% in 2014
  • Very large surplus for the Chinese external trade: USD 60bn – Drop in imports (commodities) is the main explanation. But exports dynamics was poor also (-3.3% on a year)

What will happen this coming week?

  • The main issue will be the two meetings on Greece (11 and 12)
  • GDP growth number for the Euro Area in the 4th quarter will be available on Friday
  • Retail sales in the USA (Thursday) and the inflation report in UK (Thursday)
  • Industrial production indices in Europe (France, UK, Italy, Euro Area)
  • Employment numbers for the 4th quarter on France (Friday)

What can we Learn from the Week of the 17 November?

On Monday, I record a podcast in French (here) on macroeconomic news of the previous week and on macroeconomic news expected for the week to come.
The translation in English of the podcast can be found below

What can we learn this week?

Companies’ surveys have shown, on average, a lower momentum in November.
In the United States, the PMI/Markit survey still shows a robust growth profile but with a weaker trend than during last spring.
This can also be read in production indices. The manufacturing production index published by the Fed was in October growing at the moderate pace. On a 3 month change basis, it was up by 2% compared to +7.2 % last June (annual rate).
As the inflation rate for October was stable for the third month in a row at 1.7%, there are no immediate incentives for the Fed to change its mind on monetary policy. No pressures for a rapid hike in its interest rates. Continue reading