The whole document is available in pdf format September round-up of the summer_s events
Let’s start with the global outlook – are signs on the world economy still as robust as they were?
The situation has changed since the start of this year. The world economy was fuelled by faster world trade growth in 2017, but this is no longer the case. Trade momentum has slowed since the start of 2018 and no longer looks able to drive the same impetus across the economy as a whole.
Business surveys worldwide point to a slowdown in export orders, reflecting more sluggish momentum worldwide.
Why did we see an acceleration in 2017?
Central banks loosened monetary policy in 2016, at a time when inflation was low in most countries, bar a few exceptions such as Russia and Brazil. The Federal Reserve raised its leading rates at a very slow pace and steered its communication to ensure that investors were not spooked, especially in emerging economies.
More accommodative monetary policies kindled domestic demand in each country, spurring on economic activity and trade, and triggering broad-based momentum that was beneficial for all concerned and set the world economy on a virtuous trend.
What has changed since then?
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The ECB has dramatically changed its monetary policy. The Asset Purchase Programme (APP) will stop next December. The amount that will be bought by the ECB will be halved after September to EUR 15bn.
The ECB will continue to invest the proceeds of its portfolio. It will guarantee the liquidity of the market and maintaining rates at a low level.
The ECB said that rates will not increase before the end of summer 2019.
Wait and see attitude of the #ECB in the management of its monetary policy. This is a sequel of the cyclical inflection observed since the beginning of the year. Is it permanent or temporary? The answer to this question is essential but it is still discussed by economists.
The ECB does not show a strong will to quickly change its strategy. That’s why we should not be surprised if asset purchases continue beyond the date of September 2018. The central bank is supposed to stop buying assets if the inflation trajectory is consistent with the monetary authorities’ expectations. This will probably not be the case. Moreover, by not creating the idea of a rapid break, the ECB should allow the euro to depreciate against the greenback. This would have a stabilizing effect on the eurozone economic outlook. This is all the more likely as the Fed will be much more active in countering the destabilizing effects of Donald Trump’s fiscal policy.
World growth stepped up a pace in 2017 as a result of a policy mix that was heavily on the side of demand, while effective monetary accommodation worldwide combined with loose fiscal policy to further drive this recovery.
This extra demand had a positive impact on manufacturing activity in particular, leading to a recovery in world trade.
This upswing turned the trend around in the sector in the euro area as well as in France, where job trends displayed a shift, stabilizing and even improving in 2017 after several years on a downtrend, if we include temporary employment in the sector. There was also a knock-on effect on services, pushing up overall activity overall.
“To reduce the European unemployment rate, the ECB must copy the Fed’s behavior”
Growth in the euro area picked up considerably in 2017 coming out at 2.5% vs. 1.8% in 2016, and hitting its highest point since 2007. The ECB played a lead role in this economic improvement: its policy of keeping interest rates very low by maintaining the main refinancing operations rate at 0% and via its asset purchase program on longer maturity securities was very effective.
These moves helped encourage Europeans to spend now by reducing the incentives to hang onto their wealth and spend it later, and in this respect, ECB President Mario Draghi skilfully steered the situation. The growth we are currently witnessing is driven by private domestic demand i.e. household spending and investment.
Yet unemployment remains high in the euro area, standing 1.4 points above end-2007 figures, when it came to 7.3%. This means that growth has not yet fully completed its upward adjustment. Continue reading