US economists are mobilizing against Donald Trump’s protectionist measures. The interdependence of developed and emerging countries, but also the dependence on global trade are today too important to take the risk of changing the rules abruptly. In view of the on cooperative political climate, we can not rule out retaliation and escalation that would be very detrimental to growth, employment and standard of living. The experiences of the past must necessarily help us to think.
“Over a thousand economists have written to Donald Trump warning his “economic protectionism” and tough rhetoric on trade threatens to repeat the mistakes the US made in the 1930s, mistakes that plunged the world into the Great Depression.
The 1,140 economists, including 14 Nobel prize winners, sent the letter on Thursday amid an escalating row over trade between the US and the European Union. Trump has imposed tariffs on steel and aluminium imports but has granted temporary reprieves to the EU, Australia and other countries.
“In 1930, 1,028 economists urged Congress to reject the protectionist Smoot-Hawley Tariff Act,” the authors write, citing a trade act that many economists argue was one of the triggers for the Great Depression….”
Continue reading here in the Guardian
During the first quarter, growth was robust in the US and in Spain, slightly lower than expected in France and weaker than anticipated in the United Kingdom.
The first graph shows the GDP quarterly change since 2015, the annual average growth for the last 3 years and the carryover growth for 2018 at the end of the first quarter.
The US growth was, for the first quarter, at the same level than the 2017 average at 2.3% Nevertheless, the figure is slightly lower than the last three quarters of 2017. The impact of the strong fiscal policy is not seen yet in these numbers. The carry over growth for 2018 is at 1.7%.
The 2.2% trend seen since the beginning of 2011 is still the framework for the US growth dynamics. (see the graph on the French version of this post)
In Spain, growth figures are strong since the beginning of 2014 even if the momentum has been a little lower for the last three quarters. The trend is almost linear at 3.2% since 2014. The carryover growth for 2018 is 1.8%
In France, growth was just 0.3% (non annualized) after 0.7% during the last 3 months of 2017. In fact the first quarter figure is just a correction after the 2017 non-sustainable path for the French economy. The current trend (since 2013) is 1.3% for France, therefore 2% was too much to be sustainable. I maintain my growth forecast at 2%.
The carryover growth for 2018 is 1.2% at the end of the first quarter.
In the UK, the trend is clearly weaker since the Brexit referendum. The second graph shows the real GDP level and the trend calculated from 2014 to Q2 2016 (the referendum was on June 23). We see that there is a huge and enlarging gap between the trend and the real GDP profile. It is the cost associated with the Brexit decision. There is no reason to see a reversal in this gap. The carryover growth for 2018 is 0.7%.
French growth slows in Q1 2018 with + 0.3% (non annualized) vs. 0.7% in Q4 2017. Carryover growth for 2018 is 1.2%.
Explanation : a more limited dynamics of business investment and a marginal contraction of exports. This is consistent with the inflection seen recently in the surveys.
My expectations for 2018 is 0.4% on average per quarter. The first quarter is consistent with this. The main point to look at will be surveys during this spring. But April was not a good start. See here
Is the French economy becoming virtuous? With the public deficit falling below the 3% mark, it is tempting to think so… 2.6% for the full year 2017 and 2.1% for the last quarter of the year, so it is really very tempting.
But yet if we look at the figures and the consistency of public accounts with the acceleration in growth in 2017, our bubble bursts as the public deficit profile perfectly follows the trend in growth, which virtually doubled between 2016 and 2017, surging from 1.1% to 2%, so public finances naturally improved. We can see on the chart the strong consistency between the public deficit profile and the pace of real growth with a two-quarter lead. The deficit improves alongside economic growth but it is still difficult to stay on course when growth slows.
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.
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.