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?
Employment increased in the euro area during the first quarter (+ 1.4% annualized). The pace of job creations is solid. However, since the beginning of 2018, productivity has lost momentum and it doesn’t improve. GDP is not growing fast enough in the face of rising employment. The risk is that an external shock from, for example, global trade will penalize activity with after that a quick adjustment on employment. The economy does not create leeway (no productivity gains) that may cushion negative shocks. That’s worrisome.
The cost of the Brexit referendum is becoming increasingly expensive for the British. The GDP’s deviation from its pre-referendum trend continues to widen despite the rebound in growth in Q1 (+ 0.5%). The France is in a more comfortable situation. When will this joke stop off? Because it is the citizens who pay the bill
World trade is slowing down sharply. In the last quarter of 2018 compared to the last quarter of 2017, trade is now up only 1.5% against 3.9% in October. The adjustment is not finished if we follow the Markit indicator of export orders in the USA, Japan and the Eurozone.
Asia is the region that contributes the most to this slowdown. Its 3-month contribution to global import growth was at + 4.8% in September and dropped to -5.3% in December. This persistent shock on trade is the result of the choices made in the White House. The brutality of the movement explains the change in outlook on activity since last summer but also the Fed’s new view on its monetary policy.
German growth stopped during the second half of 2018. During this period, the GDP was up by only +0.1% compared to the first six months (at annual rate). It can be seen on the graph that the main source of growth inflection is external demand. Its contribution fell sharply in the second half of the year. The slowdown in trade with China and Asia (a consequence of a Trump effect on Chinese trade) explains the stagnation of exports. But imports are growing rapidly due to a strong private domestic demand. This is the major point of the graph. Until 2015, the contributions of internal private demand and external demand were of the same order. This is no longer the case and private demand is now the main contributor to growth and with a certain margin. The weight of foreign trade is still important in Germany, but it’s no longer the main source of the German dynamics. The German economy is normalizing its structure and it becomes comparable to other developed countries where the main source of the GDP growth is the private demand. This shows a greater dependence on its internal market. This is not bad news for the Eurozone.
Since the referendum on Brexit in June 2016, the dynamics of the British economy have been shrinking. Evidenced by the slowdown in growth in 2018 to 1.4%, the slowest pace since 2012 and a pace, as in 2017, slower than the Euro zone and France.
To fully appreciate the divergence between the United Kingdom on the one hand and France and the euro zone on the other, I calculated a trend starting in 2013 (beginning of the recovery everywhere) and ending in the second quarter of 2016 at the moment of the referendum.
The trend of each country is then extended while retaining the initial parameters. I then calculate the deviation (in%) of GDP to this trend. These are the three curves on the graph.
The UK curve is 2.5% below its pre-referendum trend. The cumulative difference since the choice of the British reflects the cost associated with it even before the Brexit is formally established (March 29, 2019 theoretically).
At the same time, the acceleration of growth in the eurozone and in France throughout 2017 marks these two countries, above their trend. France is 1.7% above the trend and the euro zone 0.8%.
Despite being the UK’s largest trading partner, European expansion has not benefited the UK. This is a very disturbing element.
Nevertheless, the expected slowdown in eurozone growth, beyond the effects of Brexit, should weigh on the economic situation across the Channel and increase, ex post, the cost of the referendum.