Sustained growth in the Eurozone since the beginning of the year

Growth has been robust since the beginning of 2017. In the second quarter, the economic activity was up by 2.5% after 2% during the first quarter and 2.4% in the last three months of 2016 (annual rates). Compared to the second quarter of 2016 the GDP level is 2.15% higher and the carry over growth for 2017 at the end of the second quarter is 1.7% (in other words, if growth is 0% in the third and the fourth quarters than the average growth for 2017 will be the same than in 2016). The graph shows this with a strong acceleration during the last three quarters.
Corporates surveys suggest that the growth momentum is strong so the Euro Area GDP growth will be above 2% on average for 2017 (2.1% for Natixis AM) Continue reading

What could make the ECB change its strategy?

This is the question we could well raise the day after Mario Draghi’s press conference that followed the monetary policy meeting.

The President of the ECB was emphatic in convincing his audience and the entire investment community that there is no question of the central bank changing the way it operates for now, even though it has adjusted the way it communicates on its policy. Any reference to a possible cut in interest rates was deleted from the press release, but according to Mario Draghi, this is not enough to indicate the announcement of a change in policy. The ECB is neither ready nor willing to change policy.

Insufficient inflation, which lags well behind the 2% target set out by the ECB, is the main factor behind this status quo. The President of the ECB again insisted that inflation volatility was solely due to oil price fluctuations. The other components of inflation are much more stable and increased by only slightly less than 1% per year on average over the past three years. This is low and still below the target. The ECB therefore has no reason to rush to change its stance. Continue reading

Economic Weekly – Views from Paris

The document is available here Economic Weekly-NatixisAM-02-09-2015

Key element of the week starting February 2
US employment has increased a lot during the last three months. The number of jobs creation was strong in January (+257 000) and the upward revisions in November and December were significant. This can be seen on the graph below.

The report was full of details that show a real improvement in the labor market
The first is the change in regime since last April. It continues in January 2015 and reflects stronger numbers since April. The second point is the strong inflow on the labor market from people who were out of the market. This means that the labor market attractiveness has dramatically changed. This is a positive signal.
On another point of view the employment rate for people between 25 and 55 years of age is improving rapidly. These people have had a succession of negative shocks. Employment has dropped rapidly in this tranche of age. Step by step they are coming back on the market. The “25-55” employment rate is now at 77.2%. It is still 2.8% below the business cycle peak in January 2008.
That’s a situation I was expecting in order to have a real perception that the situation is converging to a more normal trajectory. The fact that people are back to the labor market is the main reason to explain the marginal increase of the unemployment rate. With this in mind, this is a good signal.
But the trajectory is still far from its long-term equilibrium and that’s why there are no pressures on wages yet. The average wage rate grows at the reduced pace of 2.2%.
usa-2015-january-employment Other Important Issues

  • The situation in Greece is still fragile. Last week trips to visit European governments have not been a real success. They still have to convince that a switch between the current situation which expired on February the 28th and a new contract will be profitable for everyone. Alexis Tsipras speech late on Sunday the 8th is still close to Syriza program. On Wednesday the 11th for the Eurogroup and the 12th with the heads of government, Varoufakis then Tsipras will have to find support. A failure would drive to increasing the probability of a Euro Area collapse. (more in the document)
    The ECB has changed the refinancing conditions for Greek banks. Government bonds and bonds with the government guarantee will not be eligible anymore. The ELA instrument will be available but be more expensive than the usual procedure.
  • PMI indices were almost stable in January for the manufacturing sector in developed countries. Nevertheless, the US ISM dropped for the manufacturing sector; probably the impact of a low oil price.
  • Composite indices in the USA and the Euro Area were stable for the first and improving for the second.
  • In these surveys, emerging countries are still weak. China is below 50 and Russia in recession
  • Strong improvement in retail sales for the Euro Area in the fourth quarter (strongest since Q4 2006).
  • For the whole year the US inflation rate was just 1.3% for the headline and 1.4% for the core measure. Far from the 2% target for the preferred Fed’s target.
  • Due to poor growth prospects and to low expectations on commodity prices, the Reserve Bank of Australia has reduced its interest rate by 25 bp to 2.25%
  • Industrial production was up in Germany for the 4th quarter (2.5% after -1% in Q3) – + 1.3% in 2014
  • Very large surplus for the Chinese external trade: USD 60bn – Drop in imports (commodities) is the main explanation. But exports dynamics was poor also (-3.3% on a year)

What will happen this coming week?

  • The main issue will be the two meetings on Greece (11 and 12)
  • GDP growth number for the Euro Area in the 4th quarter will be available on Friday
  • Retail sales in the USA (Thursday) and the inflation report in UK (Thursday)
  • Industrial production indices in Europe (France, UK, Italy, Euro Area)
  • Employment numbers for the 4th quarter on France (Friday)

Two Worrisome Graphs for the World Economy

Two graphs can illustrate the uncertainty surrounding the world economy.
The first is related to the geographical sources of growth. The second is more specific to the Euro Area. It shows the fears that Mario Draghi can have on immediate prospects. He explained this point in his speech in Jackson Hole and again during his press conference last Thursday after the ECB meeting on monetary policy. Continue reading

French growth’s fragilities

On August the 14th, the French statistical institute (INSEE) will publish the GDP growth number for the second quarter. During the first three months of this year GDP growth was flat. Q2 estimate will also be close to this number. Households’ consumption is stronger but the industrial production index dropped dramatically. I expect a figure between 0 and 0.1%. But these weak numbers for the first two quarters lead to discussions about the strength of the recovery.
The government forecast was 0.9%; market expectations are now close to 0.5-0.6 % and it is not the worst scenario. To converge to 0.5% for the whole year with 0% in the second quarter then, 0.3% has to be expected for the third and the fourth quarters (non-annualized rate). With 0.1% during spring and 0.3% again in Q3 and Q4 then the average growth for 2014 will converge to 0.6%. Continue reading