Strong start for the Euro Area in 2016

The first quarter of 2016 shows a strong acceleration in the economic activity of the Euro Area. Its growth was 2.2% at annual rate after 1.4% during the last three months of 2015. During the same period, GDP was up by 2.2% in France and 3.2% in Spain (we do not have more details).
The carry over growth for 2016 at the end of the first quarter is 1% for the Euro Area and France and 2% in Spain. This should be consistent with a 1.5%+ growth in the Eurozone and France and to circa 3% in Spain.
That’s a real improvement because GDP growth was almost 0% on average in the Euro Area from 2011 to 2014. There is a real change in its economic profile (see graphs below). Now, the level of the GDP is above its pre-crisis peak. It has taken almost 8 years for that. It’s too long and has persistent effects on productivity and on potential growth. Continue reading

USA – Low growth momentum: the role of private demand

The US GDP growth was up by 0.54% at annual rate during the first quarter of 2016 after 1.4% for the last three months of 2015.
Compared to the first quarter of 2015, the economic activity was up by 1.95% and the carry over growth for 2016 at the end of the first quarter was 0.88%. To get the same economic performance (growth rate at 2.4%) than in 2014 and 2015, GDP should grow at a 4% pace during the last three quarters of 2016. That’s probably too much and that why we expect a growth rate below 2% for 2016.
The explanation of the growth slowdown of the first quarter is a lower momentum for the  internal demand and a negative contribution from next exports. The consumption expenditures’ contribution is weaker than in Q4 2015 while residential investment was stronger. Companies’ investment was lower and has contributed negatively (for both productive investment and investment in structures)

I have put charts in order to understand the dynamics of the US economy. Continue reading

5 points to keep in mind after the Fed’s meeting

The Federal Reserve has kept unchanged its main interest rate in the corridor [0.25; 0.50%]. It will continue to reinvest the proceeds of its portfolio.

5 points to keep in mind

  1. In the press release the main change is related to the absence of reference to the global economy. It’s no more a source of break in the short term. The message on the economy is focused on the domestic side and on its momentum
  2. On this point the Fed is not worried. The central bank notices that employment and consumers’ real income follow strong trajectories. Nevertheless there are remarks on the low dynamics of investment and net exports.
  3. The balance of risks on growth and on inflation is not mentioned. The risk of a break in the economic momentum has been reduced in association with the withdrawal of references to the global context.
  4. The Fed doesn’t give signals on a possible rate hike at its next meeting in June. There is no specific message focused on June meeting, contrary to what was seen in October’s press release before the December meeting during which the Fed increased its main rate. Nevertheless the door remains open if it’s necessary. I doubt that the economic momentum will improve rapidly. I’m not convinced by the systematic catch-up of the second quarter (see the graph at the bottom of the post)
  5. There will be another question in June. The global environment will probably be more complicated. The Fed’s next meeting will be on June 14th and 15th. This will be just before the Brexit referendum (June 23rd). Nobody knows the issue of the referendum but it could create uncertainty in the UK and in Europe. Moreover we will also have general elections in Spain (before June 26 probably), the second round in Austrian presidential elections and we don’t know yet how the Greek issue will be solved. In other words, if systemic uncertainty grows on Europe, US assets could be perceived as safe haven. Therefore, in this environment the Fed could keep its rate unchanged at its June meeting.



10 points from Mario Draghi’s press conference

Here are the most salient points of Mario Draghi’s press conference after the monetary committee of the European Central Bank

  1. ECB interest rates remain unchanged. The refi rate is at 0% and the deposit facility rate at -0.4%.
    Mario Draghi said in his introduction that the ECB expect them to stay at current or at lower levels for an extended period of time.
  2. Negative interest rates have had positive effects on financial conditions
  3. Interest rates will be higher only when growth and inflation will be higher
  4. Current outlook on economic activity is stronger but it is not enough yet
  5. The inflation situation is not as dire as before  but “now we have to be patient”. “We have to wait” as it was said buy the ECB president
  6. On a shorter view, Mario Draghi expects a negative inflation rate in coming months but a positive one in the second half of this year. At this time, the comparison with 2015, for the oil price, will be more favourable.
  7. The main point in the ECB action is to remain proactive, as it has been last March and before, to avoid a spillover of low inflation on wage and price settings. The risk of deflation would then be high.
  8. The ECB has not discussed the possibility of helicopter money. Draghi has not even discussed this possibility
  9. M. Draghi said that during the last four years, the ECB monetary policy was the only policy that has adopted a pro-growth profile.
  10. He said that the ECB was dependant on law not on politicians. He wanted to reaffirm the ECB independence after allusion from politicians in recent weeks.

Mario Draghi is waiting for the effects on its monetary policy on the economic activity and on the inflation rate. A lot of measures have been taken in recent months and specifically last March and they haven’t developed all their power yet. It will take time as the global environment is not supportive and cannot be a spontaneous support for the Euro Area.
The ECB has decided to maintain its accommodative stance on monetary policy. Therefore, interest rates will remain low for an extended period. Mario Draghi has not not excluded lower rates even if it’s not a issue now. The current stance is a pause.

The ECB has given details on the purchase of corporate assets. 5 points to keep in mind

  1. The asset is not from a bank or from a company owned by a bank
  2. But a paper issued by a company that owned a bank is eligible
  3. The paper has to be issued in euro
  4. The maturity of the paper will be between 6 months and 30 years
  5. The ECB will be able to intervene on the primary or/and the secondary markets.

The peak of the US business cycle is passed

I maintain that, following the production capacity utilization rate, the peak of the American business cycle has passed. This may be consistent with an unemployment rate which fell again.
The downturn in the energy sector, after the falling price of oil, spreads to the rest of the economy through a lower momentum in investment in the mining sector.
This does not suggest a recession but a shift in US activity that will be amplified by the uncertainty coming from the political campaign after the caucus of July.