Rapid growth in the Euro Area, troubles in Spain and the United Kingdom takes down

The economic prospects in the Euro Area are clearly on the upside in September. The synthetic index which is a weighted average of the manufacturing and services indices is at its highest since April 2011. This suggests a rapid growth figure for the second part of 2017.
The manufacturing index is at its highest since February 2011 and the index for services is close to top levels seen at he beginning of the year.
Growth and employment are on the upside. It’s time for the Euro Area to create conditions for a long term sustained growth strategy with structural reforms locally and for the European institutions

The graph compares the composite indices for the 4 major countries of the Euro Area plus the United Kingdom
The French economic momentum is now close and in phase with what is seen in Germany pushing the Euro Area dynamics on the upside. Spain remains a major contributor. It’s hard for Italy to follow the other 3 notably in the service sector.
The question of Spain is important: it has been a major contributor to the EA growth since 2014 but internal troubles after the referendum in Catalonia could create a less homogeneous trend in Spain and could damage the EA prospects. For the moment the uncertainty remains high.
The United Kingdom does not take advantage of the contagion that may come from the Euro Area. We see that since mid-2017 there is a divergence between the Euro Area and the UK. That’s Brexit uncertainty.



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Strikes in the UK – Just the beginning?

The strike in two McDonald outlets in the UK is interesting. The main reason is the lack of security associated with zero hour contracts and the low level of compensation.
It’s not a huge movement yet and McDonald headquarter said it is just 0.01% of their workforce in the UK who are on strike.
My guess is that this movement could rapidly grow in a near future. Continue reading

United Kingdom – The Debt to Income Ratio is now too High

In a recent post I was worried by the potential weakness of UK domestic demand after the fall of the real disposable income for three quarters in a row and by the downturn of the saving rate (see here). I also said in this post that consumer credit was growing too quickly. This post is a complement.
We can go further by looking at all the households’ financial liabilities.
The graph below shows the ratio of the households’ total liabilities to the disposable income. This ratio is now higher than the level that triggered the 2008 financial crisis.
When we go into details we see two divergent trajectories for  the debt and the  disposable income. These profiles are a source of constraints for households.  Debt is growing too fast and a rebound in disposable income is necessary to avoid a further weakness first on consumption and after on real estate.




United Kingdom – Weak domestic demand and higher rates from the Bank of England – A recipe for a recession?

Negotiations on Brexit may lead to a negative and persistent shock in the United Kingdom as it will deeply change rules for the external trade. Therefore there is a need to carefully look at the domestic demand momentum in order to eventually counterbalance this negative and persistent shock.
At the same time, the Bank of England has mentioned (Carney in Sintra or Saunders here) that the monetary policy could be normalized. In other words, the BoE is wondering if there is still a need for stimulus. Here too it is interesting to carefully look at the domestic demand to see if the need for stimulus is superfluous or not. Continue reading

Soft Brexit …or how to do a swift about-turn

In the wake of the UK elections, the ensuing confusion suggests an increasing likelihood of a soft Brexit, as Theresa May does not have a majority and will have to deal with the situation as it stands. However, it cannot, and will not, be quite that simple as this would mean going back on the result of the Brexit referendum.

One source of confusion derives from the fact that British citizens’ image of Europe has changed considerably in the space of a year, and according to a survey by PEW Research Center in Spring 2017, a majority of the population in the UK has a positive view of Europe i.e. 54%, or 10 points higher than this time last year at the time of the referendum.

The idea of a soft Brexit has emerged as a result of Theresa May’s losses at the recent general election. Continue reading

The Bank of England dilemma

Interesting time in the UK as the Bank of England is facing an important arbitrage. There are potentially two types of shocks in the UK.
One is associated with the consequence of the Brexit on the growth momentum. And the other reflects higher inflation rate (above the 2% target).
The BoE meeting this morning has shown that MPC members may have very different views on monetary policy drivers. At this meeting the vote was 5 for rate stability and 3 for higher rates.
Just a reminder: the BoE has reduced its main rate to 0.25% last July just after the referendum on Brexit in order to accommodate the possible negative risk associated with the referendum result.

Two graphs on recent data can illustrate the MPC dilemma.  Continue reading