The first point is the rapid slowdown in manufacturing activity in Asia. It is contracting in the 4 major countries, from China to Japan, South Korea and Taiwan. The movement is even faster for countries that are more dependent on China for product assembly. This is the case for Taiwan and Korea.
This negative shock is a consequence of Trump’s trade measures and weighs very heavily on Asia in general and China in particular. The postponement of the sanctions planned for US imports from China, which were due to take effect on 2 July, is a good thing. However, if the resumption of the Sino-American dialogue makes it possible to avoid the worst, nothing seems to be resolved on the merits and uncertainties will remain. (With regard to the Vietnam index, are you surprised by the recent interest of the American administration? Chinese activity has moved there)
Synthetic indices on economic activity and new export orders, world trade will continue to slow in the coming months as Asia has been the region most affected by the US measures.
The dynamics of the Eurozone are slowing down quickly. The advanced estimate published last week for the Euro zone has been revised downwards. In the flash estimate it still showed a contraction to 47.8 but slightly improved compared to May (47.7). The final version is 46.6. Activity is slightly worse than in May. The decline in activity is faster. In addition to the contraction in activity already observed in Germany, there are now also those in Spain and Italy. The Spanish index plunges to 47.9 and that of Italy to 48.4. The French index, although revised downwards by 52 in the estimate at 51.9, is improving compared to spring developments. Three of the four major countries in the Euro zone have rapidly contracting manufacturing activity. Will growth forecasts have to be revised downwards?
With regard to the dynamics of foreign trade, it can be seen that the profile is the same as that of synthetic indices. Germany is pulling the whole thing down and Italy and Spain are now making a significant contribution to the contraction in orders.
The German situation will continue to deteriorate. The dynamics of world trade will not reverse rapidly, further penalizing the manufacturing sector. But in addition, the slowdown in the cycle, measured here by the IFO index) will result in a slowdown in the labor market. Employment dynamics will slow down and this inflection will be all the more important as the downward nature of the cycle lengthens. As a result, domestic demand in the German economy will be weaker and could encourage the government to pursue a more flexible policy to offset the negative effects of the international environment. Let us not doubt then that all the countries in the area would benefit from it. The risk is that we really have to go into the negative part of the cycle for the Germans to react. Moreover, even if the ECB is active, as Draghi suggested last week, this will not be enough to reverse the trend.
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
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.
The inflation for the Euro Area was at 1.4% in January after 1.6% in December. The main reason for this drop is the negative impact of the oil price. The energy contribution to the inflation rate was 1% in October and just 0.25% in January. This will continue and the contribution will become negative during the first quarter of this year. This reflects that the oil price is currently lower than in 2018 and this will continue allover the year. As the core inflation rate is circa 1%, the headline inflation rate will close but below 1% in 2019.
Except in the US, the mood perceived through all the Markit surveys is negative. In the Euro Area the index is just above 50 at 50.5 but the German index, its main engine, is now in the contracting zone. Japan is converging rapidly to 50. This US will not have the possibility to pull up the global activity. Its momentum is not strong enough. Moreover, this US index has also to be interpreted with the Fed new monetary policy framework. The US central bank has stopped its monetary policy normalization at its January meeting and I can’t imagine that it’s mainly linked with external downgrades. It would be the first time ever that the Fed makes a change in its monetary policy orientation on external elements. I can’t believe that the Fed change is not dependent mainly on the US outlook.