The Economic Cycle in France and French Economic Policy

Growth in France is set to come to 1.8% in 2017 and 1.7% in 2018. From today’s standpoint, these figures look high as trend growth for the French economy came to slightly more than 1.1% on a yearly basis between 2013 and the third quarter of 2017, making 2017 and 2018 look like good vintages. However, a comparison with the pre-crisis period is harsh. Trend growth for the French economy stood at 1.8% over the period between 2000 and 2008 and could go well beyond this figure, which equates to the cycle peak in today’s economy.
The extent of the economic cycle provided leeway for all concerned as growth could go well beyond this trend, e.g. coming out at 4% in 2000. French economic policy at the time did not generally view this cycle peak as an opportunity to adopt a more restrictive strategy, and France as a whole was unable to reduce imbalances when growth was strong, particularly from a budgetary standpoint. The French budget “funding pot” concept, invented during periods of vigorous growth, was used to justify all sorts of spending on the back of higher budget revenues. Continue reading

My contribution “The World Has Changed, …”

You will find below the link to an article, “The World Has Changed, and There Is a Need for Proactive Fiscal Policies” that was published in “International Banker” in the January issue.
It analyses the economic outlook and the risk associated with imbalances in the economic policy mix

“There is an economic and political malaise in many developed countries. For most of them, their growth profile is lower than what it was before the 2007/2008 crisis. In the US, the trend growth is marginally above 2 percent, and this cycle is the weakest since World War II. And even if the unemployment rate is low, close to full employment, the perception is that there are still rooms for improvement, but in an environment without wage pressures. This is a new situation…..”
Read here

 

A more accommodative ECB? My macroeconomic column

Point #1The global economic momentum remains weak
World trade was up by only 2% when November 2015 is compared to November 2014. This growth rate is still below the average seen before 2008 (blue band on the graph).  The explanation framework based on the absence of growth drivers seems always the good one. No impulse from the US or China and the incapacity for the world economy to converge to a higher growth trajectory. Continue reading

Uncertainty and adjustment on markets

Five points on the current situation
1 – Global level: the expected growth for the world economy is low, no strong drivers in the US, Europe and China. That’s our scenario (we had before the current crisis see my blog here)
The Chinese move on its currency a week ago is a signal that after having done a lot to support their internal market (large SOE indebtedness, stock market bubble) they have tried to improve the situation by depreciating their currency.
It’s a signal that says that the situation is worse than expected
2 – On market the message is: the world economy will have a longer period of low growth without inflation. It means that investors have to rescale their expectations to this trajectory. By itself it’s not a contagion from China to the rest of the world by mechanical means, it’s the fact that growth prospects are persistently lower than thought
3 – Chinese authorities have a role here: they didn’t accept the convergence of the equity market to a kind of fair value after the burst of the bubble. What we’ve learned from 1987 notably is that , in order to reallocate resources, it’s better to let the market to adjust by itself with an accommodative monetary policy
The Chinese authorities have blocked the adjustment by forbidding sales and by imposing investment to brokers. The market is probably still far from its fair value and this will imply further adjustments. This will lead to uncertainty as every Chinese investor will try to exit from the market. (see here)
4 – The good point associated with this situation is the fact that oil price drops dramatically. This will be positive for European economies as consumers’ purchasing power will be boost.
So the impact for western countries will be limited:
a- Because if growth is weak in China, the equity market adjustment is not the sign of a recession
b- Equity markets will adjust downward with volatility in Europe but if the sequence is not too long it will not affect behaviors. It is just if the crisis lasts that we could have an impact on confidence
c- Lower oil price will have a positive impact – The price could go lower (remember 1998 )
5 – This situation will lead to lower interest rates. This is what we currently see with 10Year TBonds at 2% but the probability of a non-action from the Fed at its next meeting (16-17 September) is increasing. The global monetary stance is still accommodative and will remain for an extended period (see here)

The French Cabinet Reshuffling

The French cabinet reshuffling has consisted of the exit of 3 important ministers: Arnaud Montebourg who was economy minister, Benoit Hamon minister of education and Aurélie Filippetti minister of cultural affairs.
The minister of education and the minister of cultural affairs have been taken by two women whore were already ministers.
The main change is the nomination of Emmanuel Macron as the economy minister. He replaces Arnaud Montebourg. He is a young civil servant who has worked at the prestigious Inspection General des Finances at the economy ministry. He has also worked with the bank Rothschild. But what is interesting is that he was Francois Holland advisor on economic affairs from the beginning of Hollande mandate until June 2014. He was then replaced by Laurence Boone who was chief economist Europe at Bank of America Merril Lynch. Continue reading

Mario Draghi’s speech in Jackson Hole? A game changer

In his speech in Jackson Hole, Mario Draghi has launched new thinking for a new economic policy in the Euro Area.
His starting point is the analysis of unemployment (major theme this year in Jackson Hole) which has short-term and more structural explanations. He said that in such an environment, monetary and fiscal policies must be coordinated in the short run to support demand and that at a mid-term horizon structural reforms were needed in order to improve competitiveness and growth autonomy (his text is here)

Short term issues
Mario Draghi is clearly worried as the Euro Area can be characterized by its low economic momentum, its high structural unemployment rate and its low inflation rate (0.4% in July)
Continue reading