Hard Brexit and the severe risk of a recession

Sterling’s decline is the most visible effect of Brexit so far. It has shed close to 17% against the dollar since the referendum, and more than 14% to the euro as at October the 18th.
We can identify two phases to this trend: firstly, in the wake of the referendum on June 23, and secondly after Theresa May’s speech to the Conservative Party Conference in Birmingham on September 30. She announced that the United Kingdom would officially notify of its intention to leave the European Union by March 2017 at the latest 
(the rally on October 18 was due to the possibility that the UK Parliament could vote on the treaty after negotiations are complete.)

Two comments can help understand the reasoning behind hard Brexit. Continue reading

3 Graphs on US Retail Sales in September: A Low Momentum

Retail sales were up in September. They increase by 0.6% after a retreat of -0.2% in August and a weak rise (0.1%) in July. On average for the quarter, retail sales are up by 2.9% after 6% during the second quarter. We see the summer change in the graph below. The three measures presented are weaker in July, negative in August and the rise is modest in September
The important measure is the core (in red in the graph above) that is defined as retails sales ex auto, gasoline and building materials. It’s an aggregate that is used to calculate households consumption in national accounts. Continue reading

Mayday in the UK

The situation is changing rapidly in the UK with the perception that the current government strategy is following the hard line.
The following article by Philippe Legrain discuss this strategy and its political consequences for the UK

Mayday in the UK

by Philippe Legrain
LONDON – Conservative Brexiteers – who campaigned for the United Kingdom to vote to leave the European Union – continue to blather about building an open, outward-looking, free-trading Britain. But the UK is in fact turning inward. Prime Minister Theresa May, who styles herself as the UK’s answer to Angela Merkel, is turning out to have more in common with Marine Le Pen, the leader of France’s far-right National Front, than with Germany’s internationalist chancellor.

May set out her vision for Britain’s future at the Conservative Party conference this month. She pledged to trigger the UK’s formal exit process by the end of March 2017, and declared national control over immigration – not continued membership in the EU single market – to be her priority in the upcoming “Brexit” negotiations. That stance puts the UK on course for a “hard Brexit” by April 2019.

The article is available here

The Parliament must have a role in the Brexit decision

The article below supports the idea that the Parliament has to be associated to the decision to notify the Article 50. The historical change associated with the Brexit mustn’t depend only on one person even with the support of the referendum.

The Article 50 challenge shows parliament should have its say

The legal arguments are finely balanced but favour the claimants, writes Jolyon Maugham

The long-awaited hearing of the legal challenge to the government’s intention to trigger Article 50 began on Thursday. Hoisted outside the High Court was a placard: “Article 50 is a suicide note!” But inside, it was the question, “Ah, but who holds the pen?” that occupied the judges.

The case, which will recommence on Monday, asks whether triggering Article 50 requires an Act of Parliament. The claimants, who include fund manager Gina Miller, say it does. The government says the royal prerogative will suffice. What this means in practice is an executive act of Theresa May, the prime minister.

But why does it matter? And who will win?

The complete article is here

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%.
The explanation has to be found in the oil price profile. I explained that in a post in August (see here). Continue reading

The Fed is ready to hike its rate in December

The Federal Reserve continue to think that the long term value of the fed funds follows a downward adjustment trend. This reflects an almost pessimistic perception of the US economic trend even if no recession is expected.
In the short run the Fed expects to being able to increase its rate in December 2016 without creating damage on the economy. The US central bank wants to catch some degree of freedom in the way it manages its monetary strategy. But a hike in December doesn’t mean a strong upward trend for 2017.

The Fed’s message is almost pessimistic on the long run as it expects the level of its rate (the fed funds rate) will follow a downward adjustment. Last June this long term level was anticipated as being at 3%. In September it is expected at 2.9%.
The Federal Reserve thinks less and less that the economic cycle will converge to its pre-crisis features. It’s important as it reflects a kind of secular stagnation with low growth and limited inflation in the long-term. If we follow the Fed’s forecasts then we see that the nominal GDP growth is never expected to be above 4%  Before 2007 it was fluctuating between 4 and 6%. The Fed thinks that the US economy will not go back to this corridor and that’s the main reason for low interest rates. Continue reading