What a shock!!! GDP growth for the second quarter was just up by 1.2% after 0.8% during the first three months of 2016.
The comfortable framework that was used after the publication of the first quarter no longer holds. The expected rebound is not there as the graph below shows.
This may put at risk the forecast for 2016. It the Q2 growth figure is maintained (in the second and third estimates), the growth number for the year could converge to 1.5%. The carry over is a mere 1% for 2016 at the end of the second quarter. For the whole year, 1.5% will be attained if growth is 2.4% in the third and the fourth quarters. This figure (2.4%) is close to what was seen on average for the last five years. This would lead, this year, to a simple 1.5%. Not that strong. Continue reading →
The GDP growth number for the Euro Area was halved in the second quarter when compared to the first. During the first three months of the year, GDP was up by 2.2% at annual rate. During spring it was up by a mere 1.2%. For France, GDP growth went from +2.7% in the first quarter to -0.2% in the second. In Spain, growth momentum is still buoyant at 2.8% after 3.1% during the first three months of the year.
The carry over for 2016 at the end of the second quarter is 1.3% for the Eurozone, 1.1% for France and 2.6% for Spain. Continue reading →
The Federal Reserve has maintained its main interest rate in the corridor [0.25; 0.50%] at its July meeting. Last December it increased it by 25 basis points from [0; 0.25%].
In the press release (see here) published after the meeting, the US central bank has just added a sentence in the part related to its action and to monetary policy (see here). It said that “Near-term risks to the economic outlook have diminished”.
In other words, headwinds are no more a strong drag for economic growth. This is notably the case for external elements as the Brexit referendum and China.
This doesn’t mean that the Fed will normalize its monetary strategy rapidly even if its perception on the economic activity is more positive (this is the first part of the press release). There are no worries about a rapid spike of the inflation rate. Pressures on wages are still limited.
I maintain the idea that the Fed may hike its interest rate may be once, not more but the probability of 0 hike is high.
Two remarks on the Fed’s monetary policy
The long-term equilibrium level for the fed fund rate.
The FOMC members consider that the long-term equilibrium level for the fed fund rate is now 3%. It’s way below the level of 4.25% that was expected at the beginning of 2012. The Fed’s perception of the business cycle has dramatically changed. The US central bank doesn’t believe anymore that it will converge to its pre-crisis profile. The expected trajectory of the US economy is much lower now. The framework that prevailed before the crisis is no longer the good one but the Fed says us that a new framework hasn’t been found yet. The Fed lacks of certainties
The second remark is on the rapid change in expectations by the FOMC members. The 2 graphs below show the evolutions of FOMC members for the fed fund rate in 2016, 2017 and 2018. They show the cumulated distribution in December 2015, March 2016 and June 2016. I show also the median for each distribution (the median in the above graph is the long-term equilibrium to which there will be convergence in the long-term).
Between December 2015 (meeting during which the Fed increased its rate) and March 2016 expectations strongly shifted on the left for the three maturities. The shift was repeated in June for 2017 and 2018. Expected rates now are way below those anticipated in December. The Fed clearly lacks of certainties.
In this paper, Daniel Gros, wonders if the Norwegian solution for the United Kingdom is the good one after the notification of the article 50.
The author says that beyond the question relative to the free movement of people which a necessary condition to adopt the Norwegian framework there is the question of the regulation. In this new framework and to continue to have access to the single market the UK will have to follow and to adopt the EU regulation. Will it be a progress? Not sure
Britain’s Moment of Truth
BRUSSELS – Britain’s vote to leave the European Union has put the country’s role in Europe in limbo. Every day that passes deepens the impasse between the United Kingdom and the EU and makes the future more uncertain.
The EU leadership would like to move the process along and has called on the UK to immediately take steps to do so, as outlined in Article 50, the member-withdrawal provision of the Treaty of Lisbon.
After a vote, people are generally happy with the result. That’s what we see in France after a presidential election. With a new president there is a new situation and a majority of people think it will be better in the future. That seems logical and easy to understand.
British are different. They have just voted for a major change in their institutional framework as they want to exit from the European Union. We can expect that a majority of British people will be happy with that.
This is not the case. In July, the households’ confidence index drops deeply by 8 points (deepest drop). Clearly there is no enthusiasm for this fracture.
More than that, expectations on the economic activity for the next 12 months is trending downward dramatically. There is a risk of self prophecy for a recession. The message was that a Brexit could lead to a recession (see economists). The Brexit has been voted and people are worried by this perspective. They will adopt a lower profile for their expenditures because of the uncertainty created by the risk of recession; they prefer to save. But as demand addressed to companies will be lower, the probability of a recession is high.