Archives par catégories : Countries/Regions

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

With Americans taking care of their health, can the Fed relax?

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In the first quarter, Americans allocated over half of the increase in consumption spending to healthcare, which represents an increase of 10% on an annualized basis compared with previous quarter. Without this acceleration, real household consumption would not have increased 3%, as published the day before yesterday, but rather a mere 1.3%; GDP would not have flat-lined but fallen 1.0%, all other variables held constant.

A detailed analysis of these numbers undoubtedly curbs the newfound optimism resulting from the announcement of a 4.6% increase in spending on services in the first quarter and the publication of an encouraging April jobs report. The Fed is not likely to be able to ignore this news.

 

Bonds Gone Wild

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Will they rise or won’t they? There is no end to the uncertainty on the future direction of long-term interest rates. Impatience is growing as well, with, however, this paradox: the fear of being surprised by a precipitous drop in prices on the bond markets (i.e. rocketing long rates) contrasts with the long-held desire to see long rates increase, which would be a clear signal that economic conditions have improved. For nearly one year (since the start of the « taper caper »), the US market has been on edge. Now, the Bank of Japan has said it is concerned that Japanese bond markets are not taking the country’s new inflation context into account, worried about the effects should inflation finally wake up. These kinds of comments are surprising to say the least….

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« .

Chinese slowdown: time to face the fatcs

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Excuses for China’s poor external trade figures in March were in no short supply. Exports were down sharply for the second straight month, falling 6.6% compared with March 2013. February’s 18% cliff dive was chalked up to distortions from the timing of the New Year holiday; similarly, March data was said to be the result of abnormally strong results the year before. For the 11% slide in imports, falling commodity prices are to be blamed. So there is no need to worry, China is going through a rough patch but government stimulus is already righting the ship…

Central bank’s fight against underemployment

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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?