Weaker productivity gains and shock on world trade My weekly column

The tricky economic outlook in developed markets is the result of a shock on economic activity due to a sharp slowdown in world trade, combined with insufficient productivity growth to trigger a swift recovery in economic activity. The risk of a long-lasting shock hampering both activity and the labor market is particularly high, as economic policy has little leeway to cushion these shocks and spread the cost out over time.

The decline in productivity gains is a real source of concern, especially for developed economies. In short, productivity is the surplus created by the production process, so when we talk about the production process, one plus one makes a little bit more than two: this “little bit more” equates to productivity gains. Depending on the time period and the efficiency of the production set-up, this “little bit more” can vary in size. In the past, productivity gains were vast, with growth of 5.8% per year in France on average in the 1960s, and this led to a downtrend in working time, an increase in wages and the implementation of an effective social security system (productivity gains = increase in production per hour worked in volume terms). The higher this surplus, the greater the production system’s leeway to redistribute these gains to all citizens.

Due to the very nature of the process, these gains drive self-sustaining momentum that helps cushion shocks and swiftly sets an economy back on the track to growth and jobs. The higher the gains, the more readily the economy can recover quickly and on a broad scale.

The current period since the crisis in 2008 has been characterized by a clear slowdown in production per hour worked across all developed countries. This is shown in the table below, which outlines average annual productivity growth across three time periods: an extended period between 1990 and 2007, the period since the US recovery in 2009 and the phase since the recovery in Europe in 2013.

Economic Policy Shocks

The desynchronization of economic policies, especially in the US, has caused negative shocks to the global economy, resulting in a downward synchronization of the economic cycle. Trade policies create breaks in value chains and all countries are affected (one product is manufactured in 3 countries A, B and C. If tariffs are put on the link between A and B reducing or modifying the activity on the product in A and B so C is affected). The dynamics of trade has been reduced in recent months in Asia (not just China) affecting exports in the Euro zone (see graph).

Productivity gains are no longer enough to cause an endogenous rebound in growth. Shocks therefore have persistence. Consequently, monetary policies will remain permanently accommodative and interest rates will remain very low for all maturities.
The economic model and the social model will have to adjust to this new pace. Hard challenge for European countries

The inevitable Chinese slowdown – My weekly column

This post is available in pdf format My Weekly Column – January 28th

Growth in China slowed again in 2018, with an average of 6.6% across the year vs. 6.9% in 2017.
This remains a respectable figure, but it is the lowest since 1989 and 1990 as shown in the chart opposite. The 10-year average is also at a low, at around 8%. The 10% that had previously been typical of the Chinese economy is now a thing of the past, and expectations of a shift back to this trend are unrealistic. The Chinese economy is changing, setting the stage for a slower pace of growth. 

A weighty challenge for the world as a whole
Slowing Chinese growth often sets off the warning bells on world growth as a whole. Having hinged on developed countries during the period after the Second World War, growth is now dependent on the situation in China, which has displayed exceptional expansion since the start of the 1990s, creating strong and long-lasting impetus for the world overall.

The world growth driver is now China, rather than developed markets, and this shift is particularly vital as potential growth in developed countries has been on the wane since 2008. Right across the globe, from the US to France, growth that can be sustained in the long term while not generating permanent imbalances is weaker than before the 2007 crisis, and none of these countries can drive strong and self-sustaining growth from within their borders. Meanwhile, China managed to fuel momentum, taking over the role of developed economies – particularly the US – and benefiting the entire world economy.

So China managed to set the stage for stronger growth the world over on a long-term basis, either by sparking fresh competition on the Western markets, developing relationships with other emerging countries (Asia, Africa, Latam) or attracting capital to take advantage of Chinese growth, even if the price to pay for this was the transfer of technology.

According to IMF data (in current dollars terms), Chinese GDP has gone from less than 2% of world GDP in 1991 to 6% ahead of the 2007 crisis and then 16% in 2018, reflecting an astounding acceleration and putting it on a par with the euro area.

Chinese GDP as measured in purchasing power parity – a more coherent price and exchange rate system than the dollar-denominated assessment – has been higher than the US figure since 2014 and above the euro area figure since 2011.

More generally speaking, an increase in the weighting of China was achieved primarily at the expense of Europe and Japan, while the US maintained its strong representation. This also explains why the tension surrounding technological leadership is a Chinese-US matter and excludes Europe, which was not sufficiently involved in supporting China’s swift development.

A final point worth keeping in mind is that Chinese imports equated to close to 80% of US imports in 2017. A domestic Chinese shock affecting its imports would have a similar effect to a shock on US domestic demand and hence on its imports, and the worldwide impact of a shock on Chinese growth would be closer than many would expect to the effects of a shock on US growth.

Message from French households: no future

For French households, the future has darkened during the last two months. The household confidence index plummeted in December and households’ perception of their own situation or that of all French people is at a very low level, not necessarily very different from that observed during the post-Lehman shock period. 2008/2009.
This is a measure of the feeling of what is happening in France today. The difference is that in 2008/2009 the shock was external and in a way it was enough to wait for the effects to fade.
Today the shock is endogenous, it has its source in the very dynamics of French society. When we look at the year-on-year change in the household confidence index, we can see that the shock is stronger than in the winter of 1995 when the French economy froze.
The consequence is that households can no longer project themselves into the future. The perception of their own situation is very degraded leading to a more wait-and-see attitude, leading to a deterioration of the economic situation, feeding a vicious circle.
To get out of it, the government must propose measures in rupture that could change very quickly everyone’s perspective to avoid dramatic political excesses. It is he who has the responsibility and it is certainly not by accentuating the tax burden that the solution will be found.

Happy New Year

Hello
2019 will be exciting on the economic and financial ground. It has, from the outset, its share of uncertainties but will have, throughout the coming months, unexpected surprises.
It is this dynamic that we will follow together in the coming quarters.
I wish you, your family and relatives, the best on both personal and professional success.
Have a great year
Philippe