The ECB hasn’t changed its mind on its monetary policy

The ECB remains committed for an extended period to a very accommodative monetary policy stance.
There is no strategic change in the ECB economic diagnosis on the Euro Area. The recovery is getting strength and risks are now balanced. But the inflation rate is still way below the ECB target at below but close to 2%. On this specific point the ECB explains that the low oil price is an explanation but it is not sufficient as the core inflation rate is still close to 1%. Draghi said the inflation should stay close to the current level (1.3%) in coming months. Therefore no convergence to the target is expected by the European Central Bank in a foreseeable future.
In other words, the recovery is strong for the real economy side but still very limited on the nominal side. As far as the inflation rate remains low, the monetary policy will remain accommodative; the ECB will continue to purchase large amount of assets as long as long term inflation expectations do not converge to the target. It could change its mind also in case of inflation surge in coming months but that's not the ECB perception of its profile.

I do not perceive in the ECB statement a change in tone or in the way the monetary policy will change in the future. Those who thought that there was a new message at the ECB seminar in Sintra were wrong.
The asset purchases program will be discussed next autumn (probably in September) as the current one is supposed to end in next December if long term inflation expectations converge to 2% or if the inflation rate is close to the target. The amount which is currently at Eur 60bn per month will probably be lowered in 2018 as the recovery is strong but we won't have a termination date as long as the inflation rate at 2% is not expected rapidly. We can expect 30 or 40 bn per month after December 2017.
The ECB has not to hurry in changing its monetary policy stance as its impact is asymmetric. Changing it too quickly is taking a negative risk on the recovery – that's not what is wished by the ECB for the Euro area economy. The central bank can wait for a higher inflation rate before changing its mind.
The ECB target must be a stronger and more autonomous growth momentum supported by the domestic private demand. For that, an accommodative monetary policy for an extended period is still the recipe.

Euro Area – Robust Momentum in the Manufacturing Sector (June 2017)

Strong profiles for Markit indices for the manufacturing sector in the Euro Area. This reinforces growth prospects for the region. All countries are growing even Greece for which the index is above 50 for the first time in a year (but only one month June2016). France is now marginally above Spain and Germany is very robust. The consistency of all these indices will improve trade within the Euro Area feeding economic expansion

New orders momentum is getting stronger at the end of the second quarter. This should lead to a strong acceleration in the manufacturing production index in the months to come. This will feed trade and growth.
At a disaggregated level, Germany has the strongest dynamics for orders. Italy and France are trending upward and Spain is in a robust trend, but not an accelerating one.
Pressures on prices are weaker in June. This is linked to lower oil prices. This will reduce tensions on the production price index. The ECB will not see higher inflation momentum and has no reason to change its mind.

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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