Public deficit in France, Economic Apathy and Italian politics – My Monday column

Is the French economy becoming virtuous? With the public deficit falling below the 3% mark, it is tempting to think so… 2.6% for the full year 2017 and 2.1% for the last quarter of the year, so it is really very tempting.
But yet if we look at the figures and the consistency of public accounts with the acceleration in growth in 2017, our bubble bursts as the public deficit profile perfectly follows the trend in growth, which virtually doubled between 2016 and 2017, surging from 1.1% to 2%, so public finances naturally improved. We can see on the chart the strong consistency between the public deficit profile and the pace of real growth with a two-quarter lead. The deficit improves alongside economic growth but it is still difficult to stay on course when growth slows.
france-budgetdeficitGDP.png
Continue reading

ECB, Inflation, the Fed, and Employment in France – My Monday column

Inflation figures at 1.1% in February do not trigger expectations of a fast and sharp change in the ECB’s monetary policy, and Mario Draghi and Peter Praet did not indicate that they were in any hurry to implement swift or sudden change in their comments at the end of last week.
The ECB’s monetary strategy is dependent on reaching inflation in line with its medium-term objectives: the 1.1% figure does not point in this direction.
ea-2018-february-inlation
The chart below shows the contribution from each of the three main sectors to the rise in inflation, and we can see that none of them display a marked uptrend. Continue reading

Each country for itself – My Monday column

Growth has made a comeback but each country already wants to take its own path. Unity is no longer on the cards and the world economy is fast going down a very different road.

During the recovery in 2016 and 2017, the worldwide situation was relatively stable, with no major imbalances, and the central banks cut some slack when required to make it through any bumpy patches. This approach worked fairly well as the pace across the various areas of the world became more uniform, driving growth and trade momentum, and economists were constantly forced to upgrade their forecasts.

But those days are gone, and this cooperative and coordinated dimension has disappeared. Continue reading

Comments on Italian Elections

Three immediate comments
1 – The outcome is clearly in favor of populism with the 5S movement at 34%, Lega (former Northern League) at 16% and Brothers of Italy at 4%.
2 – Democratic parties that used to govern in the past are out of the picture. Forza Italia (Silvio Berlusconi) was expected to be above Lega. It is below with 14%. The Democrat Party of Matteo Renzi is below 20% at 18%
3 – There is no majority

There is a jump for populist parties and that’s what we must keep in mind. This can be explained by low economic prospects, aging population and the refugees’ crisis. The risk therefore is to try to change institutions and notably the relationships with Europe. We know that some contenders from the 5S movement and for Lega were in favor of an exit from the Euro Area.

What could happen? Continue reading

Six major changes since the financial crisis – My Monday column

Developed countries’ economies were enjoying robust growth in the first half of 2008, despite some initial cracks that had been appearing since the previous summer. That was ten years ago, and since then, world economic dynamics have transformed completely, as the sources of momentum and adjustment systems have changed, especially in developed countries.

We could potentially identify a whole raft of differences but I have focused on six that I feel are useful in helping us understand the new world economic order.

1 – World trade is no longer growing at the same pace

World trade has entirely changed pace since the crisis in 2008. Before that date, it fluctuated fairly broadly around a trend estimated at 6.8% per year in volume terms, thereby creating a strong source of momentum in each economy and driving economic growth, with an overall virtuous dynamic between trade and economic activity.
But since 2011, world trade has seen little fluctuation and the trend is now at 2.3%. The turning point in 2011 can be attributed to austerity policies and in particular programs implemented in Europe. So momentum that can be expected across the rest of the world is no longer on a par with past showings. This change is significant for Europe as the continent used to wait for the rest of the world to pick up a pace before staging its own improvement, and this explains the systematic time lag in the cycle between the US, which traditionally recovered very sharply after a negative shock, and Europe, which always seemed to be lagging slightly. Continue reading

What should the dollar’s value be? Unemployment in France – My Monday column

The hefty fiscal stimulus in the US involving a rise in spending (1% of GDP in 2018 and 2019) and the implementation of tax cuts should be seen as a shock for the international economy. The uniformity of economic policy across developed countries, which acted as the driver for the growth recovery witnessed since 2017, is now just a distant memory.

Fiscal policy in the US will clearly trigger an adjustment between economic blocks and particularly between the US and the euro area and this will necessarily involve the exchange rate. The greenback has so far tended to lose value, regardless of whether we look at the effective exchange rate (nominal or real) or the dollar/euro rate.
The big question now is the dollar’s trend over the months ahead. Will the greenback gain value or must it inevitably fall as a result of the imbalances triggered by policy from the White House and Congress?

There has been something of a logic in the trend between monetary policy expectations in the US and the euro area, and the euro/dollar exchange rate since 2007. Expectations of more restrictive monetary policy in the US led to gains for the dollar right throughout this period, as shown by the chart below. However, we can see that since the Fall of 2017 there has been a clear divergence between the two indicators. The exchange rate stands at 1.24 while monetary policy expectations put it more towards parity.
It is important to understand this point at a time when economic policy is changing in the US.
Eurodollarexchangerate-interestrates
It is worth looking back to the start of the 1980’s when the greenback gained considerably as a result of much higher real interest rates in the US than in other developed countries, reflecting the impact of Paul Volcker’s very restrictive policy when he chaired the Fed at the very start of the 1980s and then the effects of Reagan’s very expansionary fiscal policy, which led to a long-lasting deterioration in the fiscal balance and the current account balance. Continue reading

Growth, Inflationary Risk, and Euro Area Reforms – My Monday column

World growth has stopped accelerating and hit a plateau, inflationary risk is now more visible in investors’ behavior, and the ECB is advocating urgent reforms to the euro area’s institutional framework in order to make it more resilient.

After an acceleration in the last quarter of 2017, is world growth hitting a plateau? This is what manufacturing sector Markit surveys seem to suggest. The swift growth seen right throughout 2017 has ground to a halt, and while indices all stand at admittedly impressive levels reflecting swift growth in economic activity, they are no longer rising.

The global index was flat in January at 54.4 vs. 54.5 in December. This figure is very useful as it acts as a leading indicator of world trade trends. The relationship between the two metrics is important and world growth was so extensive and uniform precisely because this correlation worked well again in 2017. In this respect, monetary policy accommodation across the globe was a prerequisite for a recovery in growth, and in 2017 provided sufficient impetus to truly spark it off. Continue reading