ECB, Inflation, the Fed, and Employment in France – My Monday column

Inflation figures at 1.1% in February do not trigger expectations of a fast and sharp change in the ECB’s monetary policy, and Mario Draghi and Peter Praet did not indicate that they were in any hurry to implement swift or sudden change in their comments at the end of last week.
The ECB’s monetary strategy is dependent on reaching inflation in line with its medium-term objectives: the 1.1% figure does not point in this direction.
The chart below shows the contribution from each of the three main sectors to the rise in inflation, and we can see that none of them display a marked uptrend. Continue reading

Budget balance in France and the ‘funding pot’

Robust economic growth in France in 2017, coming in at 2%, helps ease the restrictions on public finances. The public deficit is finally set to fall below the 3% mark (2.7%), helping France shake off its image as the worst culprit in the euro area. This is the result of the French economy’s ability to benefit and take advantage of world growth.

The economic improvement drives revenues and means that countries no longer need to spend so much to shore up demand, automatically improving public finances. However, that’s not the whole story, as the French President made a campaign trail pledge to rebalance public finances during his term.

The 2018-2022  Public Finance Planning Act (link in French only) published in January does not confirm this scenario. The bill indicates that the budget balance should remain negative at -0.3% of GDP in 2022, and more worrying still, the structural balance (i.e. adjusted for cyclical components) is still poised to be negative, at -0.8% at the end of the President’s 5-year term. In other words, long-term efforts to adjust the path for public finances are poised to be inadequate over the President’s full term. Measures adopted out to 2022 will not be enough to balance public finances alone, setting aside cyclical components. Continue reading

Each country for itself – My Monday column

Growth has made a comeback but each country already wants to take its own path. Unity is no longer on the cards and the world economy is fast going down a very different road.

During the recovery in 2016 and 2017, the worldwide situation was relatively stable, with no major imbalances, and the central banks cut some slack when required to make it through any bumpy patches. This approach worked fairly well as the pace across the various areas of the world became more uniform, driving growth and trade momentum, and economists were constantly forced to upgrade their forecasts.

But those days are gone, and this cooperative and coordinated dimension has disappeared. Continue reading

Italian Elections and US Protectionism: my Monday Column

This weekend’s Italian elections failed to provide an answer to address the risk of political instability that has characterized the country since the Second World War.
The vote saw a surge in populism that the pre-election polls had not fully taken on board. The Five Star Movement looks set to win 34% of votes and the League (formerly known as the Northern League) is poised to carry off 16%, while Silvio Berlusconi’s party should gain only 14% and Matteo Renzi’s Democratic party just 18%. This marks a huge decline for the traditional governing parties as compared to 2013.

Based on the outcome expected as counting continued today, a hung parliament looks likely. There is a small amount of proportional representation, so a 40% score would be enough to secure a majority.

This potential outcome raises a number of questions: Continue reading

Comments on Italian Elections

Three immediate comments
1 – The outcome is clearly in favor of populism with the 5S movement at 34%, Lega (former Northern League) at 16% and Brothers of Italy at 4%.
2 – Democratic parties that used to govern in the past are out of the picture. Forza Italia (Silvio Berlusconi) was expected to be above Lega. It is below with 14%. The Democrat Party of Matteo Renzi is below 20% at 18%
3 – There is no majority

There is a jump for populist parties and that’s what we must keep in mind. This can be explained by low economic prospects, aging population and the refugees’ crisis. The risk therefore is to try to change institutions and notably the relationships with Europe. We know that some contenders from the 5S movement and for Lega were in favor of an exit from the Euro Area.

What could happen? Continue reading

Six major changes since the financial crisis – My Monday column

Developed countries’ economies were enjoying robust growth in the first half of 2008, despite some initial cracks that had been appearing since the previous summer. That was ten years ago, and since then, world economic dynamics have transformed completely, as the sources of momentum and adjustment systems have changed, especially in developed countries.

We could potentially identify a whole raft of differences but I have focused on six that I feel are useful in helping us understand the new world economic order.

1 – World trade is no longer growing at the same pace

World trade has entirely changed pace since the crisis in 2008. Before that date, it fluctuated fairly broadly around a trend estimated at 6.8% per year in volume terms, thereby creating a strong source of momentum in each economy and driving economic growth, with an overall virtuous dynamic between trade and economic activity.
But since 2011, world trade has seen little fluctuation and the trend is now at 2.3%. The turning point in 2011 can be attributed to austerity policies and in particular programs implemented in Europe. So momentum that can be expected across the rest of the world is no longer on a par with past showings. This change is significant for Europe as the continent used to wait for the rest of the world to pick up a pace before staging its own improvement, and this explains the systematic time lag in the cycle between the US, which traditionally recovered very sharply after a negative shock, and Europe, which always seemed to be lagging slightly. Continue reading