The Italian question remains a concern for Europe, even after the nomination of a prime minister (to be confirmed by the Italian president), who is something of a lowest common denominator between the Five Star Movement and the League. Investors are breathing a sigh of relief, with the yield spread with Germany widening at a comparable pace than last week, as shown in the chart. However, many questions remain.
A number of points are worth raising:
1 – Italian malaise
When our grandchildren study economics one day, will they systematically have to add a dummy variable* to their econometric equations for the period covering the Trump administration? Will the US economy over this period have something of a “special status” due to Trump’s and Congress’ decisions? This question is worth raising in light of moves to cut taxes and raise spending, with the ensuing effects on the appalling US public deficit.
The state of public finances is the trickiest of questions. The sustainable rise in the public deficit seems to show that the economy is undergoing a severe recession, yet this is far from true as Janet Yellen took the economy to full employment (see analysis from Jason Furman). So economic stimulus moves from the White House and Congress raise very real questions on the rationale behind this policy. Governments do not embark on economic stimulus programs when the country is running on full employment, otherwise major long term imbalances are created, which are bad news for all concerned. Continue reading
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
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
Is the US economy’s current pace set to trigger major imbalances, disrupt the current cycle and spark off a significant downturn in economic activity?
The stockmarkets’ severe recent downturn reflects investors’ concerns on forthcoming trends for the global economy, and in particular the performances we can expect from the US. Firstly, they reacted to the change in stance from the Federal Reserve on forthcoming inflation trends, expected to converge towards the central bank’s target of 2% and stay there in the long term. Secondly, rising wages confirmed this idea of nominal pressure, even if the 2.9% gain announced in January’s figures was probably a result of the reduction in number of hours worked due to unusually cold weather conditions. Lastly, the handover at the Fed added another level of uncertainty. Janet Yellen did a good job of steering the US economy, will Jay Powell do the job equally well?
I have already written at length on these matters, and an article published on Forbes.fr will provide details on the uncertainties surrounding Powell’s arrival to chair the Fed. However, looking beyond these factors, a number of other questions are being raised about the US economy.
The first question involves economic policy and the way fiscal and monetary policies can coordinate against a backdrop of full employment. This coordination has worked pretty well so far. The US economy nosedived in 2009 and both policy areas instantly loosened: it was vital that every effort be made to avoid a drastic chain of events that would end up creating higher unemployment and a long-term hit to the standard of living. This approach was successful and the country hit its cycle trough in the second quarter of 2009, moving into an upward phase that has lasted ever since. Monetary policy continued to accommodate, but fiscal policy became restrictive in 2011 and then converged to a sort of neutral situation to avoid hampering the economy. This policy combination drove the US into one of the longest periods of growth it has enjoyed since the Second World War: the pace of GDP growth was admittedly not as brisk as before, but it did not trigger any major imbalances, as reflected by an economy running on full employment and continued moderate inflation, remaining below the Fed’s target. Continue reading