Strong Economic Prospects for the New French President

The next occupant of the Elysée, the French official presidential residence, will enjoy a very favorable economic configuration. This will give the new leader greater leeway in the day-to-day running of the country and also provide more room for manoeuver in preparing the reforms the president wishes to implement. It is always easier to change the rules of the economy when there are fewer limitations on it.

The first reason for optimism is that the euro area is doing much better. Growth is set to move up a gear in 2017 as compared with the 1.7% witnessed in 2016. Spain, Germany and even Italy are displaying convincing uptrends, and France is taking the same track. Trade is therefore set to increase in the euro area and promote expansion.

It is worth remembering that a European product is partly manufactured in France and partly in other countries in the zone. An improvement in activity in one country therefore has a positive impact on the other countries along this value chain. This situation means more a tight-knit dynamic overall, encouraging an upsurge in trade and hence growth. This is one of the advantages of the creation of the euro area. Meanwhile, companies do not run into currency hitches when they trade between one country and another. So we can instantly see the impact for business of a change in France’s currency as compared with its main trading partners. A reintroduction of the franc would be disastrous and would trigger severe uncertainty. The value chain would be broken and all countries in the zone would be hit. Continue reading

The French economic cycle and economic policy ahead of the elections

This is my weekly column for  Here You can find the original in French

Since the financial crisis in 2008, trend growth has slowed down sharply across western countries.
The chart below tracks 10-year average annual growth in the US and France since 1960. In the 1960s and 1970s, French growth was very robust and considerably outstripped figures in the US, as France enjoyed a phase of catching up on growth as compared to the United States. In the mid-70s, this “catch-up” momentum came to a halt, productivity gains declined and growth slowed sharply to reach a steady trend of around 2%. US growth was slightly higher on average and displayed a more stable pace with a trajectory of around 3% until 2007.
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Stronger Growth Momentum in the Euro Area

The Eurozone synthetic index of the Markit survey for February 2017 is skyrocketing. Its level is the highest since April 2011. For France and Germany profiles are similar. The French index is back to its May 2011 level and for Germany the comparison is for June 2011.
Therefore the GDP growth for the first quarter may be stronger than expected and for 2017 the figure should be stronger than what is currently forecasted (see here).

Economic policy stances are more stable and more readable since 2014/2015. Fiscal policies are more neutral and the ECB strategy is accommodative and perceived as such for an extended period. As a consequence, companies and households’ behaviors depend more on their own constraints than on hazardous measures taken by governments as it was the case until 2012/2013. Moreover interest rates are very low, financial conditions very accommodative and the oil price is stable at a low level.
There is a need now to continue and the ECB will maintain its current strategy. This will help to amplify the current growth improvement.
The Euro Area index profile suggests that all the other countries (outside France and Germany) are also performing well (We don’t have early estimates for other EA countries). This means that the current impulse will lead to to stronger and more dense trade between EA countries creating the conditions for a more virtuous business cycle. It will be more autonomous and will create more jobs therefore reinforcing the internal demand momentum.
The main risk is on the political side.
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The ISM global index at its lowest since January 2010:The Fed can rest at its next meeting

The non-manufacturing index from the ISM survey was down more than 4 points at 51.35 in August. The sector is growing but at a slower pace. It’s its weakest level since February 2010.
With the retreat of the manufacturing sector at 49.4, the current outlook for the US economy is more fragile.
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Five graphs on the ISM: Ouch it’s ugly

The synthetic index of the ISM survey in the manufacturing sector crashed in August. It is again below the 50 threshold. We can imagine that the recent improvement was temporary as the index was below 50 from October 2015 to February 2016. The August 2016 level is way below its historical average.
The drop in the ISM index reflects mainly the fragility of the domestic market as the new export orders index is stable above 50. This drop may be temporary but it shows that the American economic is not able to rebound strongly and permanently. That’s worrisome
I’m not sure that the US economy is close to the targets defined by the Federal Reserve and  mentioned recently by Janet Yellen and Stan Fisher. We will still have to wait before the Fed hikes its main rate if it does it. Continue reading