Emmanuel Macron wants to limit risks on growth

The French President announced several measures during his press conference last Thursday.
There are structural measures such as reducing the number of pupils per primary class to 24. It is an important choice to stop the deterioration observed, for France, in every international rankings on school. This is a first step, a necessary condition for reducing inequalities and improving equality of opportunity.
The other structural measure relates to public service houses. A house should be set up in each administrative district (Post Office, Social Security, Unemployment administration, ..)
The state must re-acquire the territories to make life easier for everyone. It is also a measure of reducing inequalities and it was an initial demand of November’s protesters (yellow vests).
Comments on decentralization have not been sufficiently specified to be a structural measure. .
The objective is to allow a better equilibrium of the French society and the capacity to face a world which changes thanks to the formation, which starts with new measures at the primary level (24 pupils).

There was also a battery of short-term measures on the reduction of the income tax (5 billion as of January 2020 for 15 million French), the renewal of the non-taxed bonus, the re-indexation of small pensions (less than 2000 € ) in 2020 and for every pension in 2021.
These amounts are significant and will take effect from January 2020 as stated by Gerald Darmanin (finance minister) on the reduction of taxes.

We can make three remarks
1 – The government is paving the way for moderate but stable growth for 2019 and 2020. The measures announced last December (mainly higher income for people at the bottom of the income scale) will be a support for growth in 2019. The measures announced last Thursday will take over in 2020.
2 – The government wants to immunize the French economy from external shocks by supporting the internal demand and especially household consumption. The downturn in world trade and uncertainties are all sources of slowdown in activity. By supporting domestic demand, the government allows for a more flexible way to cushion these shocks, thus reducing the volatility of French growth.
The new measures for 2020 are smaller than those announced for 2019 suggesting that the government does not expect a extended crisis. This hypothesis is important for the business investment momentum. A higher expected demand will reflect in higher corporate investment.
What is unfortunate is that this economic response is only carried by France in Europe while the shock is perceived by all (see here)
3 – The question of financing all these measures remains fuzzy. Macron spoke about lower expenditures, elimination of corporate tax loopholes and the necessity to work longer. These three means must finance all the measures but there are absolutely no details on how it will work. It could also be through an larger public deficit but this was not discussed by the president.
It is unfortunate that the “grand débat” has not allowed a deep discussion on public expenditures . The initial stance of the November protesters was that taxes were too high. The reduction of taxes necessarily requires a reduction in spending. The choices to be made are complex, but we could have expected the “grand débat” to make collective choices on this point. This has not been the case and it is a shame because it will have to be done.

Are we heading for a new era of nationalizations?

The Dutch government has just shelled out $775million and is now the proud owner of close to 13% of the Air France – KLM group, reflecting its determination to get back on an equal footing with the French government in the airline group. The Dutch government felt that KLM had recently been badly treated within the group when the new chairman was appointed…and the battle of wills is even more fierce and surprising when we realize that the Netherlands took its stake without informing the French government. More recently, Bloomberg announced the possible renationalization of EDF with the aim of better managing this strategic energy business in France, while Germany is willing to bail out Deutsche Bank if the bank gets into severe trouble.

There is very clearly a shift in government policy on the state’s role in companies’ shareholder structures, with a feeling of the re-emergence of the State as strategist. This idea had somewhat disappeared from our textbooks, but now seems to be coming back to the fore.

Over recent years, nationalizations have usually been temporary. This was the case for General Motors in the USA in 2009, as well as for UK banks at the height of the financial crisis. There is also the example of STX in France, and the matter is on the table again with Ford and Ascoval.

Globalization is no longer seen as the systematic solution

Globalization was set against a backdrop of an open world over the past twenty years, with resources allocated efficiently. This worked well as developing countries focused on industry, especially Asia, while developed countries concentrated on services and the intellectual resources required to supply the industrial sector. This allocation of resources can be immensely effective if all participants play by the rules and if each country feels it is benefiting from the arrangement.

One reason behind this change currently under way is that the world economy is no longer seen as cooperative. At the time of the Brexit referendum, the UK indicated that it would be better off outside the European framework than within, while at the same time elsewhere in the world, Trump and Xi Jinping are building a bilateral rather than a multilateral system.

This new world order does not fit with the globalization trend witnessed in a recent past. Trump has taken a more isolationist path than his predecessors, throwing a spanner in the mechanisms of globalization with his border duties and threats. In China, the Belt and Road Initiative demonstrates the country’s determination to build its own trade routes and set its own terms and conditions.

Against this backdrop, previous trends to globalization are changing, and if all participants no longer play by the joint rules of the game, then each country is free to make up its own. This could well be what is happening right now.

Growth is too sluggish

Alongside this explanation, there is also the issue of sluggish growth on developed markets. Some countries want to take matters into their own hands and set their economy back on a stronger trend, and each country wants to be able to do what it takes to get ahead. KLM’s move fits with this approach, as the Dutch government felt it was being excluded from decisions on its own airline KLM, which could potentially be bad for jobs and the Schiphol airport hub in Amsterdam.

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

Austerity is not the solution

“The biggest policy mistake of the last decade” is the title of an article by Ryan Cooper, and the mistake is of course austerity. (It is a very US focused piece, so Brexit is not on the map.) Cooper goes through all the academics who gave reasons why austerity was necessary and how their analysis later fell to bits. (How much they fell to bits is still a matter of dispute as far as these authors are concerned.)

Here is his concluding paragraph:

“As we have seen, the evidence for the Keynesian position is overwhelming. And that means the decade of pointless austerity has severely harmed the American economy — leaving us perhaps $3 trillion below the previous growth trend. Through a combination of bad faith, motivated reasoning, and sheer incompetence, austerians have directly created the problem their entire program was supposed to avoid. Good riddance.”

To read this article by Simon Wren-Lewis click on the link


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

France – GDP growth at 1.9% in 2017

The French GDP growth in 2017 has accelerated to 1.9% on average after 1.1% in 2016. The quarterly sequence of the GDP expansion was steady at 0.6% per quarter except 0.5% in the third quarter.
The carryover growth for 2018 at the end of 2017 is 0.9% which slightly higher than a year ago. At the end of 2016 it was at 0.4% for 2017. The effort that has to be done to converge to 2% in 2018 on average will be lower than in 2017. It is just a 0.42% increase per quarter (versus 0.58% in 2017).
The very positive part of the fourth quarter report was the strength of corporate investment.

The government budget for 2018 has been defined with a 1.7% growth (or 0.33% per quarter). This means that we can expect higher receipts compared to what was forecasted. The government credibility will be measured by its ability to use these extra receipts to reduce expenditures not to increase them. In the past these type of temporary receipts were systematically spent in permanent expenditures leading to a persistent budget deficit. We can expect a different strategy from the president Macron.

A reduction in expenditures and therefore lower demand would be consistent with what we currently perceive on the business cycle. A recent survey has shown that it was quite impossible for companies to increase their production. The production capacity utilization rate is at a peak, production bottlenecks are growing and there are difficulties in hiring.
With these constraints in mind, a boost in demand through higher government expenditures would be a mistake. The target is to reduce these constraints through incentives on investment (through public investment) and education. That will be the main government task in 2018.

The graph below shows that the current growth trend is slightly lower than before the 2008 crisis. It means that there will be no catching up and that the cost of the crisis is permanent. The gap between the current GDP level and the trend from 2000 to 2008 is -8%. The GDP level would have been 8% higher without the crisis. This is quite big and this gap will widen in coming years as I do not expect a catchup of growth.