Eurozone growth painfully above 1%

GDP growth in the Euro zone is 1.2% (annualized rate) since the last quarter of 2017.
The figure of 0.2% (0.75% annualized rate) for the third quarter of 2019 does not change this trend. The carry over for 2019 at the end of the third quarter is 1.1% and growth over the year will be around 1.2% at best.
 After the catch-up in 2017, the economy of the Euro zone no longer has the capacity to accelerate. What does one do with the German budget surplus?Can we use it and put in place a more proactive fiscal policy in order to lock in a higher growth trajectory? See here in French

France – Robust but unenthusiastic growth

GDP growth in France was 1% in Q3 versus 1.1% in the first quarter and 1.4% in the second (annual rate). The carry over for 2019 at then end of the third quarter is 1.2%. If growth is again at 1.2% in the last quarter then GDP will have grown by 1.3% on average over the year after 1.7% last year. The chart shows a rapid rise in activity since the beginning of the recovery in 2013 with a trend at 1.45%. We also note the particular character of the year 2017 during which the expansion had an exceptional character (2.4%). Since the last quarter of 2017, the annualized average growth is only 1.25%. It is this figure that is probably closest to the capacity of the French economy.

Domestic demand is at the heart of this expansion, while foreign trade contributes negatively. A sharp rise in imports was observed while exports continue to grow. The rise in imports comes after a negative figure in Q2. There is a catch-up effect.
The rise in consumption has been stable on average since the beginning of the year at around 1.2%. It was at 1.3% for Q3 to compare with 1.5% in Q1 and 0.9% in Q2. Investment rose 3.8% after 2.1% in Q1 and 5.1% in Q2. These two components are at the heart of French growth. Note the continued growth of business investment despite a mediocre international environment. This may result from the temporary improvement of margins (double CICE effect and lower expenses in 2019) and a proactive economic policy in 2020 to support domestic demand. It is most encouraging. The slowdown in housing investment is worrisome but in line with what is happening in the private real estate market. The market is less dynamic with housing starts declining.

This internal dynamic reflects the economic policy that supports domestic demand to limit risk on growth. The increase in purchasing power resulting from the various bonus and the drop in the housing tax and the increase in employment, that will be seen again in the third quarter (November 8), are as much support for this internal demand. This promotes business investment.
The dynamics of the economy is not excessive. There is no strong upside on growth however the risk of rupture is limited. This is essential in a risky international context

An enduring crisis (part 1)

The world was thrown into disarray by the financial crisis in 2008 as it was forcibly pushed out of its previous very definite state, with its own momentum and its own very effective endogenous systems of control. This previous world order drove the economic success of western countries, but the world must now find a new stable framework with a new dynamic and different systems of control. The structure for this new order still remains very unclear and while there are a number of potential options, the transition from this previous – and very familiar – state to the new ill-defined set-up makes for a time of crisis.

The certainties of the past are now being called into question, and the new world order is only just emerging, so the certainties of tomorrow are not yet fully formed. This situation makes for a crisis as the past world has gone, while the world of the future is struggling with seemingly – and sometimes actually – contradictory signs.

The world as we know it in 2019 is nothing like the pre-crisis world of 2007. Our reference points have all completely changed and this is highly disconcerting. So it comes as no surprise that more radical political movements have developed and are all very similar in that they hark back to the past to try to find their bearings. Our ability to imagine these changes creating an ultimately coherent environment where we can see ourselves living comfortably is shaped by anxiety and uncertainty, which drive our behavior.

Today’s crisis is multidimensional. It is obviously a source of disruption, but contrary to common belief, it is not necessarily characterized by financial watershed. The financial aspect is merely just another source of uncertainty and while it is probably the most impressive at the time, it is actually not the most difficult aspect to address. Rather it is our changing world that lies at the heart of everyone’s gloom – and this scaremongering is excessive and contrived.

We are witnessing a very diverse and extensive range of changes that have taken place in a fairly short space of time, and it is this vast array of change that can seem frightening.

Phenomenally fast technological change is creating a new and unprecedented situation, e.g. visual recognition, which impinges on personal freedom, and feelings of being just another anonymous user, useful only as a target for personalized in-app advertising. An incredible revolution is taking place at unparalleled speed, yet this transformation does not feel like it provides a major or sustainable improvement in our wellbeing. What recent innovation has contributed more to our comfort than the refrigerator? None.

The world is also changing massively for the middle classes. Polarization of the labor market means that work for highly educated and for unqualified workers is increasing – albeit in very different ways – while intermediate jobs for those with few or poor qualifications are decreasing, with innovation primarily driving this trend. This middle class played the lead role in economic growth during the three post-war decades of boom in France, but now they just feel like bit players. This feeling is further aggravated when these employees live far from large cities with less access to healthcare, education and other public services. Here again the context has changed and the future looks much more bleak for this group. However, this situation is not just specific to France, as the Deaton review in the UK also reveals startling inequalities. This does not mean that the situation is the same across the board, but rather we must entirely overhaul some of our projections as past trends will not continue into the future.

The world balance is also changing dramatically. The same manufacturing methods are now being used in both developed and emerging countries, so the size of the world labor market has increased considerably, and this is another factor fueling difficulties for the middle classes.

Yet there are other aspects to this change in scale for the world economy. Tension between the US and China was inevitable as the real issue at stake here is political leadership, pursued via technological domination. China very quickly and relentlessly made up its previous lag as a result of vast efforts in the country, and also perhaps because of inadequate public investment in the US. This now casts doubt over US leadership in innovation: given China’s size and its increasing contribution to world growth, the balance of power in this battle of wills is fairly even. China is also developing a new way of managing its dealings with the rest of the world via its Belt and Road Initiative for example, which harbors a highly political dimension. The country’s expansion does not depend on Washington, unlike the situation in the west since the end of the Second World War.

This situation means a reallocation of resources for the US – and all to the detriment of Europe. So Europe must now stand united: the UK’s current ill-judged move is set to have drastic consequences. The world will not go back to its pre-globalization state, unless walls are built between countries around the globe. China is powerful, making it a key partner in future choices on global systems of control, whether in terms of people, goods, services or capital. Three-party communication between Europe, the US and China is vital, and a Europe that fails to stand united cannot have any influence in this trio, which would be highly damaging.

Another aspect of China’s rise is the fracture in the world’s historical dynamics. The industrial revolution took place in Europe and then extended naturally to America, so the shift towards China marks a huge swing in the world balance. French historian Fernand Braudel’s economic history went from the Mediterranean to Flanders via the Champagne fairs before making it to London and then New York – maybe China will be the last stop on this trip.

This all makes for a radical shift in the world’s reference points, with the feeling of losing our bearings and our grip on the future. America was easily seen as a natural successor to Europe, with a full range of virtues, but the same cannot be said of China.

To be followed…

This column was posted on the French Forbes’ website. You can retrieve it here

What to expect next week ? (August 12 – August 18, 2019)

Highlights

=> The recent volatility on financial markets, through lower interest rates, was the consequence of lower expectations on global growth after the White House announcements. In the coming week, there will be data on retail sales in the US (15), China (14) and UK (15). These data will show the robustness of the domestic demand. If these data are strong in the US and in China, financial arbitrage may be modified in favor of risky assets

=> GDP growth in Germany will be, in the Euro Area, the most important indicator of the week (14). The industrial production index dropped dramatically in the second quarter (-7.5% at annual rate) and this downturn is consistent with a negative growth figure (probably more than the consensus at -0.1%).
The ZEW survey for August (13) will highlight the duration of this drop —Employment figures in the Euro Area and the detail for GDP will be released on August the 14th.

=> Employment figures will be important as the unemployment rate is low now (7.5% in June) and the economic dynamics is lower.

 

 

NextWeek-August12-August18_2019

Dani Rodrik on Populism

Is it culture or economics? That question frames much of the debate about contemporary populism. Are Donald Trump’s presidency, Brexit, and the rise of right-wing nativist political parties in continental Europe the consequence of a deepening rift in values between social conservatives and social liberals, with the former having thrown their support behind xenophobic, ethno-nationalist, authoritarian politicians? Or do they reflect many voters’ economic anxiety and insecurity, fueled by financial crises, austerity, and globalization?

The document can be found here