Archives par catégories : Euro zone

The ECB could use Janet!

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The ECB could use Janet!

What a difference a week makes – between Mario Draghi expressing apparent relief at having wrung a 25 basis point rate cut out of the ECB monetary policy committee he chairs, and future Fed Chairwoman Janet Yellen, who in confirmation hearings before the Senate left no doubt that the Fed is not yet ready to reduce its level of support to the U.S. economy. Even more tangible than this contrast is the sense of frustration that many are feeling on this side of the pond. The ECB President is no Janet!

Did you say deflation?

After three years of policy that has been deflationary in every respect, the sudden panic triggered by weak euro zone inflation numbers comes as a surprise. The tone was set way back in 2010 with the adoption of the European Commission’s Stability Programme and the song has been the same ever since as the sovereign debt crisis deepened.

Scenario 2013-2014: The Financial Crisis, Act III…and Epilogue?

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New round of central bank liquidity injections worldwide

  • The U.S. economy can’t do without Fed support
  • The euro area is out of recession, but bank sector and sovereign issues remain
  • The Fed, BoJ, BoE and ECB continue to nurse ailing economies

Continued low interest rates are not enough to dispel emerging risks

  • The momentum driving global trade has been undermined for the foreseeable future
  • China can no longer act as the global engine of growth
  • Foreign exchange rate adjustments appear inevitable

Is inflation, end-point of the financial crisis, around the corner? 

  • New round of liquidity injections, currency crises, geopolitical tension, labor unrest…
  • … Inflation remains the most likely scenario, but the path ahead is unclear

A Fresh Round of Central Bank Action Coming Up in 2014

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If we’re correct in assuming the Federal Reserve is not about to start scaling back its asset purchases, worldwide liquidity injections should hit a new high next year. Whereas the aggregate balance sheet of the four leading central banks showed little change in the first half of 2013, we can expect widespread central bank activism over the next few quarters:

  • At a rate of 85 billion dollars a month, the Fed’s asset purchases should amount to 1.02 trillion dollars a year.
  • The Bank of Japan will be adding anywhere from 600 to 718 billion dollars to its balance sheet as it strives to meet its target of expanding Japan’s monetary base by between 60 and 70 trillion yen a year (making it some 40 percent larger than at the beginning of 2013).
  • The Bank of England will be buying 610 billion dollars’ worth of Gilts in connection with its objective to purchase 375 billion pounds of assets via its Asset Purchase Facility.
  • The ECB’s probable upcoming LTRO is likely, in our estimate, to provide Europe’s banks with between 250 and 500 billion euros, or 350 to 750 billion dollars.

The “Big Four” should thus be injecting a cool 1.6 to 2.5 trillion dollars into the system in annual terms (at a pace of 135 to 208 billion a month). This should continue, if not throughout 2014, then at least through the early part of the year. In the low-case scenario, that would equal 10 percent of American GDP; in the high-case scenario, it would equal almost the entire size of France’s economy in 2012! But whether the ECB follows suit or not, the annual flow of fresh liquidity should return to the highs seen in 2011 and 2012—and for the ECB’s LTROs, could even set a post-2008-crisis record.

Bright Spots in an Otherwise Lackluster Recovery

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1-Auto Industry    2-Capital Investment in France   3-Consumer Spending in Spain

Although there are still legitimate concerns about the future of the euro area, the recession is definitely over. Like all such episodes, this one comes with a number of pleasant surprises. Here are the three main ones:

• The first and most significant surprise from the investor standpoint is a recovery in Europe’s auto industry, along with improved stock performance for the firms involved.

• The second—and much more surprising—surprise is that the indicators we track on the French economy show a brighter outlook for industrial investment in France

• The third, and possibly most important surprise—given the risks that Spain’s sluggish economy pose for Europe as a whole—is that spending by Spanish consumers is clearly trending upward.

While none of these surprises taken alone has enough weight at this point to convince us to make any major changes to our growth forecasts, they each help restore a modicum of confidence—perhaps even with unexpected repercussions.

The Euro Area on its Own—With Some Heavy Lifting to be Done

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The recession in the euro area is almost officially over, but that doesn’t mean the economy is back to normal—far from it. As long as no structural growth policies are enacted, the outlook for the EMU will remain grim and member states will have as much trouble meeting their fiscal targets as before. This leaves just two options open. Either Europe reverts to austerity—in which case the recovery will collapse and we’ll be in for another slump with highly unpredictable consequences—or the ECB completely overhauls its policy stance. The latest developments in the international arena make this second option increasingly likely.

France–Germany: Comparing 20 Years of Economic History

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Une_anglaisLike all crises, the present one provides a fertile breeding ground for dogmatic, cookie-cutter statements and clichés that don’t always square with reality. So perhaps the best way to avoid making disastrous decisions on the momentous issues of today is to take a good, hard look at our past. This view was what prompted us to publish the following series of charts, which sum up twenty years of comparative economic history in France and Germany.

Growth, consumption, employment, real estate, debt, demographics, and foreign trade are the themes we have covered here, in the hope of offering the reader greater insight into the forces at work in the euro area’s two leading economies.

 

Monetary Policy: Too Much Disparity to Be Effective

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Une (anglais)The reflation policies pursued by the major central banks don’t seem to be paying off. Even with key rates at historic lows everywhere and widespread use of unconventional policy tools, lending activity remains flat and economic growth anemic. Moreover, although strong commodity prices and rising taxes have kept price levels up until recently, the inflation rate is starting to sag—in a serious way. A lack of monetary policy coordination, the inability of central banks to offset the impact of fiscal tightening, and the still-crippling effect of deleveraging on growth are the primary ingredients of this collective failure. They are also a cause for concern. If they persist, we may well be heading for a much longer crisis than is commonly assumed—and for creeping deflation that could lead economic policy-makers to act rashly. But let’s be clear about one thing. The problem is not that central banks shouldn’t be doing what they’re doing; it’s that their combined efforts haven’t gone far enough.