Traveling in Asia – Singapore

For my trip in Asia, Singapore is the forts step. The spontaneous impression is that the city is in constant reconstruction. There are building sites everywhere, the city moves and changes. Recent buildings (ten years) are destroyed and new ones are installed in a precise but evolving map of the city.

 The city has an impressive energy and these changes reflect it. I think that there is, in general, a link between the dynamics of the city, how it is able to recreate itself continuously and the ability of its people to generate a new world. 

The city by itself creates a momentum that appears to be stronger than in France. That may be why we can hear a lot of French language when we walk in the street 

Singapore at night  

A Discussion on Public Debt

Is public debt a constraint? Lars P. Syll gave recently an answer by quoting Abba Lerner who, in 1948, made a distinction between private debt and public debt. The first is reflected ultimately in a transfer of an actor of the economy to another to meet his commitments. In this case the debt is actually a constraint for one who is committed to repay.

For public debt indicates Abba Lerner, the question is not posed in the same way as generally residents of the country hold the debt. It’s a debt a country has on itself and it shouldn’t be an issue. Nevertheless there is the question of the intertemporal allocation of resources. A general argument is that a higher public debt could lead to impoverishment of children and grandchildren. This argument is swept by Lerner indicating interests and repayments of the debt will be done in the future to children and grandchildren. This is what has long been observed and still is in Japan, where public debt is majority owned by residents. The level of public debt is circa 240% of GDP and this doesn’t provoke a crisis.

Beyond Japan, the argument developed by the Moldavian-born economist is not always relevant. Continue reading

New Doubts for US Central Bankers

The minutes of the April meeting of the Fed’s monetary policy committee (FOMC) shows a determination that blunts on the need to raise interest rates quickly.
The press release issued at the end of the April meeting had already the message that nothing will be done in June. The minutes have confirmed this point.
After June, the perception is fuzzier.

  • First because the economic situation may have changed; growth will be lower this year than what was expected at the beginning of the year. But we don’t know yet if this slowdown is temporary or permanent. And FOMC members do not know either, even if they expect a mild rebound.
  • Second because the methodology has changed at the Federal Reserve. FOMC members will analyze the situation, meeting after meeting. Their analysis will be data dependent. Moreover, the FOMC doesn’t give guidance anymore. This new methodology is almost easy to manage when data are strong and the future is not too uncertain.

But in the current situation, the methodology implies that the Fed doesn’t give information because there is a large uncertainty on the economic profile. This creates a weird situation, a kind of emptiness, that is not comfortable. No elements can give the clue for the future date for a lift-off of interest rates.

For a long time I have thought that there is no necessity to rush in the lift-off of interest rates. These minutes go in my sense by saying that they can’t fix a date. The activity is sluggish, there is no inflation and the dollar is still strong. Why rush?

A proactive ECB

The European Central Bank will maintain its accommodative monetary policy for a long time period because imbalances in the euro zone cannot be reduced rapidly. In addition, it will adapt its asset purchases to market conditions.

The first aspect is recurrently developed by Mario Draghi. He wants to convince all stakeholders that the European Central Bank will maintain all the measures taken to the end. Expectations that the current monetary policy stance could not go to the end must converge to zero, that’s Draghi’s message to keep the ECB credibility intact. In other words, even if the results improve on the business level, GDP numbers for the first quarter were strong, the ECB will maintain its very low-interest rates for an extended period, the TLTRO will continue until June 2016 and asset purchases will go until September 2016 at least.

The ECB strategy is to assume that changes in behaviors, investors or economies, will take time. Monetary policy should maintain its grip to allow the economy of the Eurozone to find a more balanced position than that observed in past 4-5 years during which growth in activity was nil and inflation has converged 0%.
The main issue and challenge for ECB is there. Continue reading

USA – The Rebound that will not come

The first quarter growth was weak in the USA. The first estimate was a mere 0.2% at annual rate. The question now is about a possible rebound in Q2. Many observers have calculated that usually, in the recent past, the first quarter had a low growth number but was followed by a rapid rebound that corrects the GDP trajectory. Last year there was also a weak period during the first three months due to climate hazard. But the second and third quarters have shown a strong rebound in economic activity.
Last week, we have had April figures for retail sales and industrial production. The temptation is to compare the current momentum to 2014.

The graph below presents the 3 month change for the two indicators. I have drawn an ellipse on the two April episodes, in 2014 and 2015. We see that profiles do not look the same. There was a strong acceleration in 2014, not in 2015 during which industrial production has collapsed. This means that the probability of a recovery is low if 2014 is taken as a model.

USA-2015-April-IPI-Sales-3MMoreover, last year during the climate hazard, inventories were dramatically reduced, having a strong negative contribution to the first quarter GDP growth. In the second quarter, they were up, contributing to 1/3 of the strong 4.6% growth.

This year, inventories were up in the first GDP estimate. As demand is weak, an inventory building if it exists will be mild. It will be another source of GDP weakness for the second quarter.

In its latest forecast, the Fed of Atlanta has reduced its GDP 2nd quarter estimate to only 0.7% at annual rate. If it is the case, for the whole 2015, GDP growth could be close to 2%.
The question then, is to know, if this new environment will reduce, or not, incentives for the Fed to lift-off its rates? Janet Yellen has mentioned that the dollar has recently hurt exports momentum and US companies’ results have been constrained by the strength of the greenback.
Higher Fed’s interest rates could push the dollar higher with a risk on the US growth momentum.

To avoid a supplementary weakness of the US economy, it could be better to postpone the lift-off. We know that almost all voting members support such a move but current economic conditions do not.

Landmarks on Euro area growth in the first quarter

Growth figures in the Euro Area have been pretty good during the first quarter. The trend has dramatically accelerated in Spain, France is out of a long period of very low momentum and Italy is out of its recession.

Nevertheless, even with these good news, it is too early to be sure that the long stagnation that has characterized the Euro Area since the first quarter of 2011 is over. Austerity policies that were put in place at this moment have provoked a long recession in the Euro Area. The exit from this episode may start in 2015 with the new ECB monetary policy that focus on demand. 4 years to exit from the negative impact of these austerity policies that imagined that reduction in demand could imply a strong growth momentum (sic)
The current economic policy put demand at the front place to try to change the business cycle profile. I think that this is the best recipe to converge to a more virtuous business cycle.

This post wants to show the economic activity profile in the Euro Area and its main countries at the end of the first quarter. I do not give details of on composition of growth because usually only the GDP number has been published.

GDP Quarterly change
This graph shows the GDP quarterly change at annual rate. The red bar for the first quarter of 2015 shows strong performance in Spain, France and Italy. The German number is below expectations. Continue reading