The manufacturing sector is running out of steam in the euro area – My Monday column

World growth stepped up a pace in 2017 as a result of a policy mix that was heavily on the side of demand, while effective monetary accommodation worldwide combined with loose fiscal policy to further drive this recovery.
This extra demand had a positive impact on manufacturing activity in particular, leading to a recovery in world trade.
This upswing turned the trend around in the sector in the euro area as well as in France, where job trends displayed a shift, stabilizing and even improving in 2017 after several years on a downtrend, if we include temporary employment in the sector. There was also a knock-on effect on services, pushing up overall activity overall.

France-manufJobs

Continue reading

Shutdown and oil prices – My Monday column

The US administration’s partial shutdown marks a first in the country’s history: this is the first time that we have witnessed this type of situation when the same party occupies both the White House and Congress. It was somewhat different during Barack Obama’s presidency in 2013, as Congress was not in Democrat hands, and looking further back, President Jimmy Carter came up against difficulties in financing his budget with his Democrat majority at the end of the 1970s, but there was no shutdown.

 This failure for President Trump and Congress to get along has been the hallmark of the current Republican administration’s first year. The power dynamics between the two institutions ends up creating a puzzling sort of inefficiency. The disagreement of the moment is on the Deferred Action for Childhood Arrivals program, which involves young foreign-born individuals who arrived in the US as children. It turns out that Trump is in favor of a law to welcome them in the end, but the Republicans are unhappy with a bill partly drafted with Democrat agreement. This is a power struggle and not a cooperative political relationship between the President and Congress.

We had already witnessed this dysfunctional situation during attempts to repeal Obamacare, when Congress rejected Trump’s proposals. Continue reading

Euro Area – Inflation rate at 2% but the ECB will not move

The inflation rate was at 2% in February after 1.8% in January. It’s the highest record since January 2013. The core inflation is stable at 0.9%. It means that energy is the main driver for the higher inflation rate.
The first graph shows that the core inflation rate is stable since 2014 and the volatility of the inflation rate is associated with the oil price yearly change.
ea-2017-feb-inflation
The oil price effect has started to diminish. The second graph shows the consistency between the yearly change in oil price (blue) and the energy contribution to the inflation rate (purple). We see that the oil price change has peaked in January and will follow the red line which shows the oil price yearly change when the oil price is at 55USD and the exchange rate at 1.06.(the last point is June 2017)
The oil price impact will be transitory and the energy contribution will start decreasing in April probably as there is persistence and delay between the oil price and contribution.
In other words, after the current peak, the inflation rate will converge to the core inflation rate (circa 1%).
This temporary effect of oil price on inflation is a strong incentive for the ECB to keep its monetary policy stance unchanged.
ea-2017-february-oilpricecontrib

Higher inflation rate in the Euro Area – It’s oil price

The Euro Area inflation rate jumped at 1.8% in January after 1.1% in December 2016.
The graph below shows the cumulated contributions to the inflation rate. It can be read in the following manner: the red line is the goods price contribution to the inflation rate; the blue line is the sum of the red line plus the services price contribution to the inflation rate; the green line is the sum of the blue line and of the food price contribution to the inflation rate. Alle these prices represent more than 90% of the Consumer Price Index. The green line is almost stable; its range is 0.6% – 0.85% since mid-2014. There is no surge in inflation through all these prices.
The last line, the purple one, is the sum of the green line and of the energy price contribution to the inflation rate. Continue reading

The Inflation rate will accelerate temporarily

The stabilization of the oil price around USD 50 implies that the contribution of the energy sector to the inflation rate converges currently to 0.
In October for the Euro Area, this contribution was only -0.09%, its highest number since June 2014. The profile is the same in the US.
The point is simple. The current oil price is comparable to the price seen one year ago. This wasn’t the case since mid-2014. Therefore the energy contribution to the inflation rate was systematically negative as the oil price was lower than a year before. As prices are currently comparable the contribution converges to 0 Continue reading

Higher inflation in the Euro Area is here to stay

The inflation rate for the Euro Area (flash estimate) was at +0.4% in September. It is the highest since October 2014. In August the inflation rate was at 0.2%. The core inflation rate was stable at 0.8%.
EA-2016-September-Inflationrate.png
The explanation has to be found in the oil price profile. I explained that in a post in August (see here). Continue reading