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?
Archives par catégories : Euro zone
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
Has Spain Found a Winning Strategy?
Moody’s decision to upgrade Spain’s sovereign debt rating last week is yet another sign that investor confidence is returning to the Iberian Peninsula—a region often held up as a model for crisis-stricken Southern Europe. The Rajoy administration hopes that lowering Spain’s labor costs will boost the country’s competitiveness, enabling it to export its way out of the crisis. With a battered economy and an arduous deleveraging process that will likely leave a lasting dent in domestic demand, many see this as the only strategy for Spain to get back on track to balanced growth—even if it comes at an immediate high social cost.
So is Rajoy’s bet paying off? Has the Spanish economy picked up enough over the past few months to mark a lasting turnaround in the country’s fortunes?
Let’s Not Kid Ourselves, Mr. Draghi
The euro area is unquestionably doing better. In fact, it’s now the world region with some of the most upbeat indicators, from business climate survey results to industrial production and the outlook for exports. So the first quarter will see growth across the currency bloc—far from dazzling, no doubt, but still well above prior expectations. But let’s not kid ourselves: eurozone countries are going to be in trouble unless they get additional monetary policy support.
Germany at the Crossroads
The revival of the German economy has supported Ms Merkel since she arrived at the head of Germany in 2005. Will it continue to be the case over the next four years? This is not sure.
Germany will then need to reform itself. Some of the reforms may be historic for the country and its European future…What should we expect?