Things are a little clearer since Mario Draghi’s press conference: the ECB considers the euro’s strength a deflationary risk factor. It is likely to move as a result, albeit in a measured manner starting in June then increasingly so thereafter if necessary, which will probably be the case. Against a backdrop where most other central banks are implementing monetary policies aiming to depreciate their currencies, the hesitancy of the ECB was no longer tenable. So that was a bit of good news but let’s not get ahead of ourselves: by taking such action Mr. Draghi is trying to give the other central banks a taste of their own medicine, making life hard on the Fed, BoJ and BoC, and not the other way around
Archives par catégories : Euro zone
The last straw for the French economy
Either eight or nine countries in the euro area are probably in the grips of deflation. In response to the situation, the direction of economic policy will play a decisive role. It’s a foregone conclusion that the ECB will not take measures in the near term that will be aggressive enough to stem the onslaught of this plague. It will be up to fiscal and tax policies to take on this responsibility. By complying with the European Commission’s constraints, France risks plunging its economy into a deflationary abyss and with it, undoubtedly, all of the euro area.
Global investment: lingering disappointment
The improvement in the global economic backdrop since late 2013 has not provided the desired results when it comes to investment. Although the European recovery has shown a few positive signs, an overview of global investment trends continues to paint a disappointing picture:
- In the U.S., where recent corporate earnings and leading indicators have fallen short of expectations;
- In Japan, where the 2013 rally remains highly dependent on companies’ export performance, which has become somewhat of a mixed bag;
- In the emerging world, where many Asian countries are confronted with excess capacities, at a time when most big countries are now paying the price for their structural shortcomings;
- In Europe, where – unlike the rest of the world – leading indicators are actually encouraging: could the region rise to the challenge? Of course, such a scenario is unrealistic
The extended absence of an improvement in investment prospects is one the most troubling constraint for future economic development. We discuss this topic in further detail in « Investment inertia: what is at stake« .
Central bank’s fight against underemployment
Janet Yellen’s insistence on the enduringly-soft job market in the US during her speech this week in Chicago and Mario Draghi’s unusual insistence on the risks associated with allowing high unemployment to remain at a high rate over a sustained period in the euro area were striking for reasons others than the quick succession of the two statements. What’s to be made of the messages?
Wind of change in Germany, and for Weidmann too…
While encouraging euro area PMIs in March convinced a number of observers that the ECB had made the right decision (i.e. perpetuate the status quo), the statement from the President of the Bundesbank has lent credence to our scenario of additional stimulus…if not immediately, at least in the not-too-distant future. Such a possibility sends a couple of messages: 1- The euro area is far from being in the clear, 2- German growth is losing steam, 3- The ECB will do more but only because the prospect of the euro area are in fact frail.
The appreciating euro or the competitive deflation trap
You heard it here first: the euro would not drop versus the dollar and could even increase. And here we are. During trading yesterday, the euro flirted with USD 1.40, its highest level since October 2011 after gaining in excess of 7% since the start of the year. This is a worrying development, which could erase nearly all of the support that improving global conditions have provided to exports.
Two reasons explain why our forecasts, unlike the market consensus, never strayed from the EUR 1.40/euro exchange rate in the past two years:
• the first is rooted in our skepticism with regard to 1) the consensus that the US economy is presumably in good health and 2) anticipations that the Fed would normalize its monetary policy in response to the expected improvement.
• the second is grounded in the side effects of the competitive deflation policies carried out by the EMU countries. The shrinking inflation gap between the euro area and the rest of the world, resulting from these policies, protects the currency’s purchasing power. Consequently, these policies offer de facto support to the euro, particularly versus the greenback whose value is automatically diluted by the massive scale of pump priming in recent years.
Therefore, it is hardly surprising that the recent disappointments on American growth have pushed the euro higher, especially since the ECB dashed all hopes of additional monetary easing last week.
Mr. Draghi Seems Quite Sure of Himself…
The President of the ECB is confident in his ability to stare down deflation risk and bring the inflation rate up to its official target of 2%…on a 2016 horizon. Well that was reassuring; the euro celebrated the news by increasing to USD 1.386 this morning, a record since October 2011! Could we have expected anything different? Apparently not. The ECB wasn’t about to shoot itself in the foot by announcing that its forecast pointed to a deflationary scenario, tacitly recognizing that it would fail in its deflation battle.
Global Inflation – Disinflation Is Gaining Ground Across the Globe
At the global level, disinflation is gaining ground. After a temporary rebound during spring, global inflation continued its downtrend in the second half of 2013 and ended the year at 3.2%. Inflation remains very weak in the developed world, at 1.3% in December, and has also sagged in many emerging markets in recent months, to finish 2013 at 6.1%.
In fact, as of December 2013, nearly half the countries (39) in our sample of 80 countries had inflation rates of less than 2%, which is markedly higher than a year ago (24). These figures have seen the addition of a growing number of Asian economies (6), the United States and Canada as well as all 27 members of the EU – without exception. Moreover, the number of countries with moderate inflation (3-4%) decreased sharply while the proportion of high-inflation economies (>6%) has not changed considerably and includes African countries and conflict-plagued countries for the most part.
- Disinflation Is Gaining Ground Across the Globe
- Commodity Prices Easing
- Price Picture Still Mixed in EMs
- Deflation Risk Remains High in the West
- United States, Not Quite in the Clear Yet
- Euro Area, Deflation Risk Spreading to Core
- Imports, an Additional Source of Disinflation
- Increase in Real Interest Rates, the Bigger Threat