Tenkan!

2 mai 2013 par Véronique Riches-Flores

“Tenkan, a term in several martial arts for a swift, 180-degree pivoting move, has provided the economist and Asia specialist Jacques Gravereau with an analogy for illustrating the ability of the Japanese people to carry out radical changes in direction collectively, flexibly, and energetically.”

Does the policy shift initiated a few months ago by the Japanese authorities qualify as tenkan? On this one, the jury is still out, but in any event, this experiment already represents a key stage in the crisis affecting the developed countries.

To highlight its importance, we are publishing two papers on this question. The first one, a brief attempt to put Japan’s deflationary episode into perspective, seeks to shed light on why the country was previously in so little of a hurry to deal with this affliction, and why it now feels compelled to take an entirely new tack. Download 1st article.

The second paper is by Frank Benzimra, a specialist on the Japanese economy and financial markets based in Asia for about ten years, who has been kind enough to share his thoughts with us. He begins by explaining how Japan managed to make it through fifteen years of extremely high public debt without lapsing into chaos. He then goes on to discuss the pioneering aspects of Prime Minister Abe’s new policy. In conclusion, he puts forward three possible scenarios for the outcome of “Abenomics,” along with the three investment strategies they imply. Departing from our usual practice, we are publishing this contribution in English. Download Frank Benzimra’s article.

Leveraging France’s Key Strengths

23 avril 2013 par Véronique Riches-Flores

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In pursuit of an Alternative Path

The French economy is undeniably in a bad way. But trying to overcome its shortcomings with the kind of shock therapy inflicted on Southern Europe would be the most dangerous response, both for France and the entire euro area. An alternative approach is therefore required—one that will necessarily involve leveraging more effectively the factors that set the French economy apart. This, then, is the value of taking a closer look at France’s key strengths.

CONTENTS

France is in a bad way, with a very real risk of lapsing into critical condition

You can’t cure debt with austerity
Competitive deflation—a non-option
France, Germany: two economies, two models

In pursuit of an alternative path

Just what are France’s key strengths?
The benefits of favorable demographics for demand, investment, available capital and personal wealth
France’s underrated productivity
French companies’ international footprint and standing
R&D
Geographic location, tourism, and agriculture
Leveraging the French economy’s strengths more effectively to tackle the crisis

The Deleveraging Mirage: A Careful Look at Italy Today

3 février 2013 par Véronique Riches-Flores

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Europe’s most distressed countries should see their debt peak in a year or two, before descending to more manageable levels by 2020. Or at least that’s what the IMF, the European Commission, and the credit rating agencies all claim. Coming on the heels of the 2012 crisis, this is a heartening forecast—but a pretty surprising one, too. Just what is it based on? We’ve examined these institutions’ various scenarios for Italy and Spain, whose mounting sovereign debt burden loomed large in 2012, and for France, where the sovereign debt outlook raises a whole host of questions. Our assessment is as follows:

All these projections are marred by overly-optimistic assumptions about these countries’ structural growth outlook and their ability to sustain highly restrictive fiscal policies. This makes subsequent revisions to the projections a foregone conclusion.
Italy is a case in point: the projected growth rate is so fanciful that the country stands virtually no chance of deleveraging as hoped. More conservative forecasts would preclude the prospect of Italy stabilizing its debt in the next few years. They would show rather that by 2020, its debt-to-GDP ratio should verge on 140 percent.
Spain seems to be in a better position to achieve such stabilization in the near term. Not only is its debt-to-GDP ratio 30 percentage points lower than Italy’s, but its potential output is apparently on the way up. Italy’s isn’t.
Despite recent setbacks, France still seems to have the means to reverse its debt trajectory. If we assume average real GDP growth of 1.2 percent a year between 2013 and 2020, the country should be able as of 2015 to reduce its debt level just by maintaining a primary budget surplus.

What emerges from this analysis is that Italy is the exception—and unquestionably the most vulnerable of the large eurozone economies. This suggests that we’re in for further bad news once today’s widespread projections come up for revision. Which they probably will after the Italian elections, especially if—as is likely—the new government lacks the leeway needed to convince investors that it can and will do something about the country’s huge debt overhang.

When the Eurozone Policy Mix Becomes a Weapon of Mass Destruction

4 novembre 2012 par Véronique Riches-Flores

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Last week’s economic data should have eliminated any lingering doubts about the state of the eurozone. The recession has definitely arrived in the single-currency countries—all of them. Although the third-quarter figures turned out to be slightly less bleak than suggested by surveys this summer, that doesn’t alter the overall picture. In fact, the eurozone will probably pay dearly in the fourth quarter for the unexplained rebound in automotive output that drove the better-than-expected performance, since order backlogs have shrunk dramatically and automakers already plan to mothball significant production capacity in November.

The U.S. Economy: Still Far From the Mark

20 octobre 2012 par Véronique Riches-Flores

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In an environment dominated for months by mounting fears of the worst, pleasant surprises understandably create a fair amount of enthusiasm. That leaves economists with the thankless task of urging the enthusiasts not to get their hopes up too fast. The U.S. economy has shown encouraging signs in the past few months, including revival of the housing market, higher consumer sentiment, and, in the past few days, good news from the job market. But the country is not out of the woods yet.

The jobless rate has fallen to its lowest level since 2008. A less heartening statistic, however, is that private-sector employment has yet to recover to where it stood in 2001. In this area, the U.S. economy has not performed any better than the French economy over the past eleven years!
The housing market is unquestionably picking up, and all the evidence points to further improvement down the road. But the key drivers of demand have taken quite a bruising from the weaker economic environment of the past few years, and real estate has lost a good deal of its power to tow the rest of the economy in its wake.
Corporate profits in the U.S. are at a historic high. However, decelerating productivity growth has led to a significant slowdown in the rise of earnings over the last several quarters. The upshot is that by any standard, developments on the investment front have been extremely disappointing.
Lastly, while American pragmatism can be expected to bring about a postponement of the deadline for balancing the budget, thereby limiting the “fiscal cliff” risk to the economy, the fact remains that the country’s public finances are in alarming shape. The upcoming negotiations will necessarily turn the spotlight on one of the most disturbing issues facing the United States.

Recession for Everyone, Germany Included

28 septembre 2012 par Véronique Riches-Flores

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The current consensus will eventually collapse in the face of statistics released in the last twenty-four hours. The IFO’s July Business Climate Survey abundantly confirms a scenario that has looked inevitable since early spring—Europe has unquestionably entered a recession and no country will escape it. This should be a sobering warning to consensus economists, who were still predicting an improved outlook for 2013 in July, with 0.5 percent growth in the eurozone as a whole, 0.7 percent in France, and 1.3 percent in Germany! But while this grim news ought to prompt a wrenching re-evaluation, the forecasting community shows such inertia that we are unlikely to see any real change in the consensus until November or December. By then, it will be impossible to deny the undeniable: in 2013, the recession will spread from Southern Europe to the entire rest of the region, and the sovereign debt crisis will become increasingly hard to untangle.

€4.5 Trillion Balance Sheet Needed for the ECB to Achieve the Same Firepower as the Fed

5 septembre 2012 par Véronique Riches-Flores

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Since the onset of the financial crisis, the European Central Bank’s balance sheet has doubled in size—from €1.5 trillion in June 2008 to €3.1 trillion in August 2012. That’s impressive, but much less so than what most of the other major central banks have done, often in a much shorter time span. So the idea that the ECB is about to make use of further unconventional tools should be no cause for concern. In fact, for the eurozone to stand a fighting chance of survival, the ECB will have to pull out all the stops, going at least as far as the Fed and the Bank of England. That will mean boosting its balance sheet by another €1.5 trillion or so to a total of roughly €4.5 trillion. What should be a cause of concern is that the break with the past the central bank is about to make will prove to be less bold than required.