economic outlook in developed markets is the result of a shock on economic activity
due to a sharp slowdown in world trade, combined with insufficient productivity
growth to trigger a swift recovery in economic activity. The risk of a
long-lasting shock hampering both activity and the labor market is particularly
high, as economic policy has little leeway to cushion these shocks and spread
the cost out over time.
The decline in productivity gains
is a real source of concern, especially for developed economies. In short, productivity
is the surplus created by the production process, so when we talk about the
production process, one plus one makes a little bit more than two: this “little
bit more” equates to productivity gains. Depending on the time period and the
efficiency of the production set-up, this “little bit more” can vary in size. In
the past, productivity gains were vast, with growth of 5.8% per year in France
on average in the 1960s, and this led to a downtrend in working time, an
increase in wages and the implementation of an effective social security system
(productivity gains = increase in production per hour worked in volume terms). The
higher this surplus, the greater the production system’s leeway to redistribute
these gains to all citizens.
Due to the very nature of the
process, these gains drive self-sustaining momentum that helps cushion shocks
and swiftly sets an economy back on the track to growth and jobs. The higher
the gains, the more readily the economy can recover quickly and on a broad
The current period since the crisis in 2008 has been
characterized by a clear slowdown in production per hour worked across all
developed countries. This is
shown in the table below, which outlines average annual productivity growth
across three time periods: an extended period between 1990 and 2007, the period
since the US recovery in 2009 and the phase since the recovery in Europe in 2013.
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.
Financial markets strongly value the possibility of a trade agreement between the United States and China. Such a situation would make it possible to reduce the constraints on global trade and to order them according to the framework defined by the agreement. Nothing would then stand in the way of the return of larger trade flows likely to bring global growth once again.
This idea is attractive because it would leave the area of concern that marks the global economy since last fall and for which we do not spontaneously see a way out.
Yet this possibility of an agreement seems to me to be totally illusory. Tensions between the US and China mainly reflect a problem of technological leadership. Which of these two countries will set the standard for developments like 5G or artificial intelligence or other technologies. Both countries are in fierce competition. I can’t imagine an agreement in which one of the two countries would agree to be subject to the developments of the other. Tensions between the two countries will remain strong even if minor agreements could be signed.
This will generate tension and volatility in the overall dynamics.
The desynchronization of economic policies, especially in the US, has caused negative shocks to the global economy, resulting in a downward synchronization of the economic cycle. Trade policies create breaks in value chains and all countries are affected (one product is manufactured in 3 countries A, B and C. If tariffs are put on the link between A and B reducing or modifying the activity on the product in A and B so C is affected). The dynamics of trade has been reduced in recent months in Asia (not just China) affecting exports in the Euro zone (see graph).
Productivity gains are no longer enough to cause an endogenous rebound in growth. Shocks therefore have persistence. Consequently, monetary policies will remain permanently accommodative and interest rates will remain very low for all maturities. The economic model and the social model will have to adjust to this new pace. Hard challenge for European countries
World trade, seen from developed countries, is now at risk. The average export orders (Markit) of the USA, Japan and Euro zone fall to 48.6. The braking action is terrible. If China slows further, the global economy will be stifled.
US job growth is buoyant, but is it all down to the Trump effect? The US economy created 250,000 jobs in October, which is a bit higher than the average of 213,000 witnessed since the start of the year. However, October is usually a fairly good month for new job creation, with 271,000 in October 2017, and an average of 246,000 in the month of October since 2013 as compared to an average of 206,000 for other months.
The labor market is buoyant overall, reflecting a solid pace of economic growth although nothing to write home about with 2.25% per year on average since 2011. Continue reading →
World trade figures issued by the Dutch institute CPB have been published for the month of August.
Year-on-year, the improvement observed that has started in June has been extended to August with an increase of 3.8%. This figure is still limited as before the 2008 crisis, average trade growth was 7% per year.
On the graph, however, there is a marked divergence between the pace of trade and the export order indices of the US, Japan and the Euro zone. Usually these two indicators have consistent profiles. World trade is up while the average of these 3 Markit indices continues to deteriorate. We already noted this point a month ago but it is confirmed clearly.
The rebound in trade is mainly seen in emerging countries, particularly in Asia, but Latam and Central Europe are also on the rise.On the other hand, the situation remains weak on developed countries’ side.The trend is stable and is penalized by the pace of the USA and Japan for which the trade retreats over 3 months. The US which has increased tariffs is paying a high price for this policy. Asia, the US target, is doing well. That’s amazing.