Archives par catégories : Euro zone

Now What Do We Do?

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The raft of data coming out of the euro area in recent weeks has been more and more mediocre and has erased all doubts: the strategy for extricating the economy from the crisis in the past few years has been a failure. None of the mechanisms born of resulting from decisions made by European leaders have delivered results or are about to:
-the structural policies aimed at improving competitiveness have failed, because global trade is tanking
-as proof: Germany’s export outlook is sputtering and the ability of the euro area’s biggest economy to act as the region’s growth driver (i.e. its “appointed” role) is going up in smoke;
-fiscal austerity’s only effect, under such conditions, is to fuel deflationary pressures and are counter-productive in controlling public debt levels.

These failures hardly come as a surprise. Like many of our peers, we have been decrying these shortcomings but did we really need to spell them out before hoping to make a convincing enough argument to effect the urgent change in the direction of European economic policy? With the situation becoming increasingly dire, where should, at present, our fears and hopes lie?

Mind your Back!

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France is stumbling, Germany weakening, the U.S. wobbling, Brazil is down a match point and J. Bullard has promised us rate hikes by March… the summer is going to be a real barn burner! Will M&A activity be robust enough to continue to fuel investor confidence?

It’s looking like things are getting tight, considering recent economic developments and central banks’ bungled messages. Let’s take a closer look at the most disruptive factors from the week.

– Euro area: if Germany is a locomotive, is France the caboose?

– U.S. growth will not exceed 1.5% this year

– It’s match point in Brazil

– Beware of the impatience of certain central bankers

Who still doesn’t have a pair of “Birkies”? Or how Made in Germany sheds stereotypes

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Retailing, leather goods, shoes…German brands are flourishing in unexpected places. Birkenstocks sandals, which seem headed to becoming the must-have item for the summer of 2014, are the latest trend in a broader movement towards reshaping “Made in Germany”.

Increasingly present on European shelves, everyday consumer products with relatively low added have gained in popularity and are a far cry from the heavy industrial goods, manufacturing equipment and upscale household appliances that have forged Germany’s industrial fabric. This is particularly interesting given markets’ recent infatuation with exotic emerging countries.

Three reasons why long-term interest rates will continue to fall

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The downwards movement of government bond yields has picked up in recent weeks revealing investors’ growing indecision, whereas the consensus had promised them just the opposite. We see several reasons for the drop in long rates which, in our opinion, is not a temporary phenomenon and could, in fact, continue:

–  The market is right not to buy the Fed’s outlook

–  The ECB is beginning a long process of unconventional monetary policy, which, given the growth slowdown, should benefit bond markets more than equities.

–  Global disinflation is gaining ground

France: survey results are converging… for the worst

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Distortions from the end of the year between PMI polls, foreshadowing recession, and INSEE data, mostly reassuring, have evened out. Good news for starters, as PMIs made up for their lag, the present convergence has become worrying: all surveys, across the board, paint a decidedly ugly picture.And for two reasons:

1) the return of consumer concerns,

2) the lack of an export recovery.

The whole picture is cause for concern. After zero growth in the first quarter, the downturn of the most recent indicators accentuates the risk of a fresh – and sustained – fall in economic activity. The more-or-less consensus forecast of 1 % French growth on average is now very “passé”. In fact, French growth will struggle to do better than 0.5% this year! This is very bad news, for France and the rest of the euro area.

“Our currency, your problem”

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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

The last straw for the French economy

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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

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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« .