Emmanuel Macron wants to limit risks on growth

The French President announced several measures during his press conference last Thursday.
There are structural measures such as reducing the number of pupils per primary class to 24. It is an important choice to stop the deterioration observed, for France, in every international rankings on school. This is a first step, a necessary condition for reducing inequalities and improving equality of opportunity.
The other structural measure relates to public service houses. A house should be set up in each administrative district (Post Office, Social Security, Unemployment administration, ..)
The state must re-acquire the territories to make life easier for everyone. It is also a measure of reducing inequalities and it was an initial demand of November’s protesters (yellow vests).
Comments on decentralization have not been sufficiently specified to be a structural measure. .
The objective is to allow a better equilibrium of the French society and the capacity to face a world which changes thanks to the formation, which starts with new measures at the primary level (24 pupils).

There was also a battery of short-term measures on the reduction of the income tax (5 billion as of January 2020 for 15 million French), the renewal of the non-taxed bonus, the re-indexation of small pensions (less than 2000 € ) in 2020 and for every pension in 2021.
These amounts are significant and will take effect from January 2020 as stated by Gerald Darmanin (finance minister) on the reduction of taxes.

We can make three remarks
1 – The government is paving the way for moderate but stable growth for 2019 and 2020. The measures announced last December (mainly higher income for people at the bottom of the income scale) will be a support for growth in 2019. The measures announced last Thursday will take over in 2020.
2 – The government wants to immunize the French economy from external shocks by supporting the internal demand and especially household consumption. The downturn in world trade and uncertainties are all sources of slowdown in activity. By supporting domestic demand, the government allows for a more flexible way to cushion these shocks, thus reducing the volatility of French growth.
The new measures for 2020 are smaller than those announced for 2019 suggesting that the government does not expect a extended crisis. This hypothesis is important for the business investment momentum. A higher expected demand will reflect in higher corporate investment.
What is unfortunate is that this economic response is only carried by France in Europe while the shock is perceived by all (see here)
3 – The question of financing all these measures remains fuzzy. Macron spoke about lower expenditures, elimination of corporate tax loopholes and the necessity to work longer. These three means must finance all the measures but there are absolutely no details on how it will work. It could also be through an larger public deficit but this was not discussed by the president.
It is unfortunate that the “grand débat” has not allowed a deep discussion on public expenditures . The initial stance of the November protesters was that taxes were too high. The reduction of taxes necessarily requires a reduction in spending. The choices to be made are complex, but we could have expected the “grand débat” to make collective choices on this point. This has not been the case and it is a shame because it will have to be done.

Purchasing power, debt and jobs – the impossible French equation

This post is available in pdf format Forbes-23-01-2019-PW-en

Careful observation of the French economy provides some insight into the swift escalation in social unrest since November. The initial question of purchasing power sparked off the movement in November. At the start of the financial crisis, purchasing power was not too severely hit initially due to the hefty impact of automatic stabilizers, i.e. economic mechanisms that help even out the effects of shocks over time via redistribution. This system had worked fairly well in the past, keeping GDP fluctuations down during economic downturns. This is one of the key aspects of the French redistributive model.
With a continued weaker macroeconomic situation than in the past, the economy adapted. Three major changes can help shed some light on the social strife that has been dragging down the French economy.

The first problem is that French economic trend growth is now more sluggish than before the 2008/2009 crisis, and this has an impact on purchasing power trends.
We can analyze this situation using the chart below, providing an overview of purchasing power trends on the one hand (demand) and productivity data on the other (supply).
The purple line shows the trend in purchasing power per consumption unit and the blue line plots productivity (GDP per hour worked). We can see that these two indicators ran parallel before the 2007 crisis, then diverged until 2012/2013 before converging again, although with weaker trend growth than before the crisis. Under normal circumstances, these two indicators should move at a similar pace, and a long-lasting divergence is not feasible i.e. wages cannot be disconnected from income creation via the production process

Inflation on the upside in the United Kingdom

The current acceleration of the inflation rate creates a complex situation in the United Kingdom as it weighs on households’ purchasing power.
In April the inflation rate was at 2.7% and the core inflation rate was at 2.5%. The inflation rate has not been so high since the fall of 2013 and november 2012 for the core rate. This is mainly the impact of the depreciation of the currency after last june referendum on Brexit.
A year ago the inflation rate was at 0.3% and the core inflation rate was at 1.2%. This latter magnitude is worrisome as the economy is not growing more rapidly.
The main issue is that wages momentum will not follow the inflation profile.  Continue reading

The Japanese Economy after the increase of the VAT Rate

The VAT increase on April the 1st has had a strong and negative impact on the Japanese economy. The inflation rate spiked to 3.4%, households’ purchasing power dropped dramatically and retail sales collapsed. On the manufacturing production side, the decline was significant.
These are mechanical effects of the higher VAT rate and this is a negative and persistent shock for the economy. In 1997 with already a VAT shock, the retail sales profile was the same than now and showed strong persistence. The impact was not only perceived in April but all along the year. Loss in purchasing power (see chart below) will not be reduced spontaneously and it is the trigger of this persistence. Continue reading