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

The Fed increases its rate, but more to come

The Federal Reserve has increased its main interest rate by 25 basis points. The corridor for the fed fund’s rate is now [1.5 – 1.75%] versus [1.25 – 1.50%] since December 13, 2017. The dots graph which represents FOMC members’ expectations of the fed fund suggests that the US central bank will hike its rate 3 times in 2018 (already one is done), 3 times in 2019 but only twice in 2020. The rate’s profile contained in the dots graph is unchanged even if growth expectations are stronger according to these same FOMC members.
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

Budget balance in France and the ‘funding pot’

Robust economic growth in France in 2017, coming in at 2%, helps ease the restrictions on public finances. The public deficit is finally set to fall below the 3% mark (2.7%), helping France shake off its image as the worst culprit in the euro area. This is the result of the French economy’s ability to benefit and take advantage of world growth.

The economic improvement drives revenues and means that countries no longer need to spend so much to shore up demand, automatically improving public finances. However, that’s not the whole story, as the French President made a campaign trail pledge to rebalance public finances during his term.

The 2018-2022  Public Finance Planning Act (link in French only) published in January does not confirm this scenario. The bill indicates that the budget balance should remain negative at -0.3% of GDP in 2022, and more worrying still, the structural balance (i.e. adjusted for cyclical components) is still poised to be negative, at -0.8% at the end of the President’s 5-year term. In other words, long-term efforts to adjust the path for public finances are poised to be inadequate over the President’s full term. Measures adopted out to 2022 will not be enough to balance public finances alone, setting aside cyclical components. 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

Italian Elections and US Protectionism: my Monday Column

This weekend’s Italian elections failed to provide an answer to address the risk of political instability that has characterized the country since the Second World War.
The vote saw a surge in populism that the pre-election polls had not fully taken on board. The Five Star Movement looks set to win 34% of votes and the League (formerly known as the Northern League) is poised to carry off 16%, while Silvio Berlusconi’s party should gain only 14% and Matteo Renzi’s Democratic party just 18%. This marks a huge decline for the traditional governing parties as compared to 2013.

Based on the outcome expected as counting continued today, a hung parliament looks likely. There is a small amount of proportional representation, so a 40% score would be enough to secure a majority.

This potential outcome raises a number of questions: Continue reading