Six major changes since the financial crisis – My Monday column

Developed countries’ economies were enjoying robust growth in the first half of 2008, despite some initial cracks that had been appearing since the previous summer. That was ten years ago, and since then, world economic dynamics have transformed completely, as the sources of momentum and adjustment systems have changed, especially in developed countries.

We could potentially identify a whole raft of differences but I have focused on six that I feel are useful in helping us understand the new world economic order.

1 – World trade is no longer growing at the same pace

World trade has entirely changed pace since the crisis in 2008. Before that date, it fluctuated fairly broadly around a trend estimated at 6.8% per year in volume terms, thereby creating a strong source of momentum in each economy and driving economic growth, with an overall virtuous dynamic between trade and economic activity.
But since 2011, world trade has seen little fluctuation and the trend is now at 2.3%. The turning point in 2011 can be attributed to austerity policies and in particular programs implemented in Europe. So momentum that can be expected across the rest of the world is no longer on a par with past showings. This change is significant for Europe as the continent used to wait for the rest of the world to pick up a pace before staging its own improvement, and this explains the systematic time lag in the cycle between the US, which traditionally recovered very sharply after a negative shock, and Europe, which always seemed to be lagging slightly. Continue reading

The new French president and growth at 1%

This is my weekly column for Forbes.fr. The French version is available here

The new French president will have to deal with an economy that is growing at a spontaneous rate of close to 1%, which is the average figure observed since the start of 2013. The new leader’s challenge will be to break with this trend on a sustainable basis, in order to create enough jobs to cut back unemployment and generate additional revenues to finance the social welfare system more effectively and more comprehensively.

Each candidate is of course fairly optimistic on the projected growth profile, expecting the average figure to be slightly under 2% in 2021/2022: in the space of five years, the new president therefore thinks that he/she could almost double the French economy’s growth rate. This is highly ambitious.
Judging by the growth profiles expected by the various candidates, the financial crisis, which has been going on for almost 10 years, will only have had a temporary impact as the economy could converge towards its pre-crisis trend by the end of the president’s forthcoming five-year term. This analysis is mistaken: the French economy has been permanently marked by this crisis. Like most western economies, it has suffered severe and persistent shocks that hampered its growth momentum. The US, the UK and other countries are witnessing a similar situation. Sluggish growth is not an exclusively French phenomenon and other countries are also taking a long time to find a way to return to pre-crisis growth levels.

France-2016-Q4-GDPLevel
In view of French economic figures, candidates’ projections display considerable determination on their part, as the economy is not spontaneously converging towards 2%. Continue reading

Mario Draghi and the technological change

In a recent speech, March the 13th, Mario Draghi the ECB president explains the link between monetary policy and technological changes perceived as sources of productivity improvements.
This might at first glance seem an unusual topic for a central bank conference, since monetary policy principally operates through the demand side of the economy. But the long-term supply picture evidently also affects our ability to deliver on our mandate.
Much of the debate today about the true level of the real equilibrium interest rate, for example, is a debate about the outlook for productivity growth, which of course depends in large part on innovation and entrepreneurship. Higher productivity growth is also vital to safeguard Europe’s economic model of high wages and social protection, and hence to counter the sense of economic insecurity that is currently prevalent in several advanced economies.

Read the speech here

USA – Can a rebound be expected in the second quarter? Yes probably

After the strong downward revision of the GDP estimate for the first quarter, can a rebound be expected during the second quarter?
The ISM survey can give part of the answer. The chart below compares the productivity index calculated by the Bureau of Labor Statistics and a measure of productivity taken from the ISM survey.
The two series are consistent and we see a rebound on the ISM measure during the second quarter. It is an indication that the drop seen in the first quarter was probably temporary and that the economic activity was better oriented during spring.
USA-en-2014-June-ISM-productivity

According to the European Commission, the French Economy lacks of Resilience

A report from the European Commission suggests that France (see here ) has lost a large part of its capacity to react and to adapt its behavior to an adverse environment. In other words, when the situation changes rapidly the French economy is not able to give an efficient and immediate answer.
This means that even if the global environment is getting better, the French economy will not be able to take advantage of it by adapting its behavior. This reflects a lack of competitiveness and a productivity that is growing at a pace that is too slow.
Competitiveness issue can be seen on the first chart. External balance is negative since 2005 with a deepening from 2008 on. The problem is not that it is between 2 or 3 % of GDP, it comes from the fact that it is in this range every year since 2008. In other words, exports are not competitive enough to balance imports. We have to keep in mind that the main reason for exports is to buy what cannot produce by domestic companies. If it’s not manageable then it means that exports lacks of competitiveness (the difference between cost and non cost competitiveness comes after).
Productivity is on a downside trend as it can be seen on the second chart. I’ve taken 5 year growth in order to limit short term volatility. In Q4 2012, the last point available, trend productivity growth is 0%. It’s important as productivity growth will create a surplus that will make extra revenues for employees and for shareholders. If productivity growth is zero there is nothing else to share. Productivity will grow through productive investment. On chart 3 we see that investment is not strong, still lower in level than before the crisis. The lack of investment cannot reverse downside productivity trend.

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