Growth, Inflationary Risk, and Euro Area Reforms – My Monday column

World growth has stopped accelerating and hit a plateau, inflationary risk is now more visible in investors’ behavior, and the ECB is advocating urgent reforms to the euro area’s institutional framework in order to make it more resilient.

After an acceleration in the last quarter of 2017, is world growth hitting a plateau? This is what manufacturing sector Markit surveys seem to suggest. The swift growth seen right throughout 2017 has ground to a halt, and while indices all stand at admittedly impressive levels reflecting swift growth in economic activity, they are no longer rising.

The global index was flat in January at 54.4 vs. 54.5 in December. This figure is very useful as it acts as a leading indicator of world trade trends. The relationship between the two metrics is important and world growth was so extensive and uniform precisely because this correlation worked well again in 2017. In this respect, monetary policy accommodation across the globe was a prerequisite for a recovery in growth, and in 2017 provided sufficient impetus to truly spark it off. Continue reading

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.

Euro Area: The manufacturing sector momentum falters. Rebound in the United Kingdom

The manufacturing sector momentum is faltering in the Euro Area in August but there is a real rebound in the United Kingdom.
The synthetic index for the Eurozone was at 51.7 in August after a local peak at 52.8 last June. In the UK, the index is at 53.3 way above the July figure of 48.3 that followed the referendum on Brexit.

The first graph shows indices in the main countries of the Euro Area. Germany is robust with an index close to 54 (53.6). But there is a significant drop of the Italian index which now is below the threshold of 50. It’s the first time since January 2015. The Spanish index is at 51 for the second month in a row. Such a weakness hasn’t been seen since the end of 2013. France is in a “comfortable place” under the threshold of 50 since March 2016.
We see that France has not been able to follow the Eurozone momentum since at least the beginning of 2014. It must be a concern in France at the eve of the presidential election. Continue reading

Low momentum in the US

The Markit index for the manufacturing sector was marginally down in August. It was at 52.1 versus 52.9 in July. The average for the first two months of the third quarter is 52.5 versus 50.9 for the second quarter.  There is an acceleration of the manufacturing activity between the second and the third quarter. This was seen also in the manufacturing index that was published by the Federal Reserve last week.
Nevertheless this stronger pace will be transitory.
The graph below show the strong consistency between the Markit index and the manufacturing Production Index from the Federal Reserve. The lower index in August suggest that the width of the recent acceleration will be limited.
The new orders dynamics is also limited. The ratio of new orders to inventories is above  1 but is not accelerating.
In other words, there are no pressures on the economy and that’s the main reason for the Fed to maintain its current strategy.

Slow trend in the Euro Area

The Markit survey synthetic index was stable in August. It was at 52.3 as in July. The average of the first two months for the third quarter is 52.3 which is marginally above 52.2 which is the second quarter average. This level is consistent with a 0.3% (1.2% at annual rate) growth during the third quarter. There is no fracture that could come from the referendum in the United Kingdom. Brexit effects are still to come (see here and here on the first impact on investment)
Looking at the index trend we see that its level is almost stable since the beginning of 2015. This shows that the Euro Area economy is not able to go faster than the current 1.5% growth. It has no capacity to accelerate. This is not enough. Continue reading