> The world economy’s slightly chaotic showings reflect the likely end to a world balance dominated by the US, as well as the hunt for a new world order. This multi-faceted balance would include the US, China and Europe. > This quest for a new equilibrium can be witnessed first and foremost in the current less coordinated and cooperative context, where each country seeks to get the most out of a situation where the rules are changing. Border tariffs are just one example of this. > In the short term, this leads to uncertainty that drags down economic activity, as well as investment. Growth is slightly more sluggish across the board, while inflation remains contained and is still a far cry from the central bank’s target, especially in the euro area.
> There is a tendency towards continued accommodative monetary policy. Going too fast when all the risks for the economy have not fully emerged means taking the risk of having an insufficient impact and running out of options when the situation becomes more tricky. > This would be the case for the US, where interest rate cuts being made too quickly would mean a fresh surge in liquidity, promoting more real estate lending and corporate credit from non-banking institutions, so excesses already seen would become even more severe. This would also heighten risks on these markets and curb the Fed’s ability to act in the event of a future crisis. > Another key point is that long-term rates are set to remain very low for a very long time, until such times as this new world balance emerges: this will force the financial sector to reinvent itself.
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.
Concerns and uncertainties on
world economic activity having been gathering pace since the fall. The swift decline
in world trade reflects this change in pace, moving into the red with a
contraction of 0.4% in January vs. yoy growth of 4% in September 2018. This turnaround has triggered
concern from the OECD and the ECB, prompting them to slice back growth
projections for the euro area in particular.
The very heart of this economic
question is whether this shock is permanent and persistent, and in this respect,
there are two interrelated questions worth noting, as well as another third
The first point is the political
explanation for this downturn. Trade tariffs applied by the White House have
shifted the balance of trade between the US and China, leading to a swift slowdown
in trade in Asia since the start of the fall and acting as the main
contributing factor behind the decline in world trade as a whole. By targeting
China directly, Donald Trump is actually damaging the entire region.
The other aspect is the
uncertainty triggered by the White House’s political choices, as doubts on
trade following border tariffs are further heightened by the threat of fresh
trade moves. A case in point is the German automotive sector, which could be
hampered by a border tax of 25%, as the US threatens to impose tariffs on $11bn
in European exports to the US in retaliation for European subsidies to Airbus. The
WTO will have the final say, but there is also a further threat as Boeing is
now struggling with recent problems on its 737 Max.
US job growth is buoyant, but is it all down to the Trump effect? The US economy created 250,000 jobs in October, which is a bit higher than the average of 213,000 witnessed since the start of the year. However, October is usually a fairly good month for new job creation, with 271,000 in October 2017, and an average of 246,000 in the month of October since 2013 as compared to an average of 206,000 for other months.
The labor market is buoyant overall, reflecting a solid pace of economic growth although nothing to write home about with 2.25% per year on average since 2011. Continue reading →
Corporate surveys in November show that the pace of growth is still accelerating in the Euro Area. This can be seen at the global level but also in every sector, notably in the manufacturing sector where the stronger momentum is consistent with a higher international trade dynamics. Surveys also show that employment is increasing rapidly and that nominal pressures remain limited. Continue reading →
During the first half of 2017, the employment level came back at its pre-crisis peak level. This was already the case for the first quarter but it has been confirmed for the three months to June.
This robust profile in employment reflects a catch up when growth is more robust and with less uncertainty. On the graph we see that the employment profile is smoother than the GDP profile and is clearly in a catch up period.
Since the beginning of the recovery at the beginning of 2013, the Euro Area has added 6.6 million jobs. Continue reading →
Synthetic indices on economic activity stabilized in August according to the Markit Survey that was out this morning. These figures are consistent with a 0.5/0.6% GDP growth for the third quarter (non annualized figures).
The employment momentum is still robust but doesn’t accelerate anymore. But the business cycle is still virtuous with a strong momentum in the manufacturing sector. The survey price index stabilized in August. The ECB can maintain its accommodative bias on its monetary policy. The more expansive euro has not yet influenced companies’ behavior. Continue reading →