Catch up and more balanced growth in the US

GDP growth was at 2.9% in the third quarter after 1.4% during spring. The carry over growth for 2016 at the end of the third quarter is 1.4%. Growth for the whole year can now be expected at 1.6%.
During the third quarter we’ve seen a catch up that partly compensate the weak figure of the second quarter.
This doesn’t create pressures that could push the Fed to act rapidly. It will do nothing during its next meeting(next week) and we still anticipate a 25bp hike during the December FOMC meeting. The trend in the economy is not strong enough to imagine a rapid pace of increase from the Fed. We think that the Fed will give minimum guidances for what it will do in 2017 in order to limit crazy expectations (remember the beginning of 2016).
We see on the following graph that the GDP trend is around 2.1% in this cycle which way below what was seen before the crisis. This cycle is the worst since WWII and that’s an important reason not to act too rapidly.

The composition of the GDP is interesting. The graph shows contributions to GDP growth.
We see that internal demand is almost stable and that’s the main source of growth. But we see that this doesn’t reflect in a strong momentum for the GDP. That’s why the increase in investment in infrastructure is interesting. it could create incentives for private productive investments boosting growth. This could help to exit the risk of secular stagnation

Hard Brexit and the severe risk of a recession

Sterling’s decline is the most visible effect of Brexit so far. It has shed close to 17% against the dollar since the referendum, and more than 14% to the euro as at October the 18th.
We can identify two phases to this trend: firstly, in the wake of the referendum on June 23, and secondly after Theresa May’s speech to the Conservative Party Conference in Birmingham on September 30. She announced that the United Kingdom would officially notify of its intention to leave the European Union by March 2017 at the latest 
(the rally on October 18 was due to the possibility that the UK Parliament could vote on the treaty after negotiations are complete.)

Two comments can help understand the reasoning behind hard Brexit. Continue reading

3 Graphs on US Retail Sales in September: A Low Momentum

Retail sales were up in September. They increase by 0.6% after a retreat of -0.2% in August and a weak rise (0.1%) in July. On average for the quarter, retail sales are up by 2.9% after 6% during the second quarter. We see the summer change in the graph below. The three measures presented are weaker in July, negative in August and the rise is modest in September
The important measure is the core (in red in the graph above) that is defined as retails sales ex auto, gasoline and building materials. It’s an aggregate that is used to calculate households consumption in national accounts. Continue reading

Mayday in the UK

The situation is changing rapidly in the UK with the perception that the current government strategy is following the hard line.
The following article by Philippe Legrain discuss this strategy and its political consequences for the UK

Mayday in the UK

by Philippe Legrain
LONDON – Conservative Brexiteers – who campaigned for the United Kingdom to vote to leave the European Union – continue to blather about building an open, outward-looking, free-trading Britain. But the UK is in fact turning inward. Prime Minister Theresa May, who styles herself as the UK’s answer to Angela Merkel, is turning out to have more in common with Marine Le Pen, the leader of France’s far-right National Front, than with Germany’s internationalist chancellor.

May set out her vision for Britain’s future at the Conservative Party conference this month. She pledged to trigger the UK’s formal exit process by the end of March 2017, and declared national control over immigration – not continued membership in the EU single market – to be her priority in the upcoming “Brexit” negotiations. That stance puts the UK on course for a “hard Brexit” by April 2019.

The article is available here

The Parliament must have a role in the Brexit decision

The article below supports the idea that the Parliament has to be associated to the decision to notify the Article 50. The historical change associated with the Brexit mustn’t depend only on one person even with the support of the referendum.

The Article 50 challenge shows parliament should have its say

The legal arguments are finely balanced but favour the claimants, writes Jolyon Maugham

The long-awaited hearing of the legal challenge to the government’s intention to trigger Article 50 began on Thursday. Hoisted outside the High Court was a placard: “Article 50 is a suicide note!” But inside, it was the question, “Ah, but who holds the pen?” that occupied the judges.

The case, which will recommence on Monday, asks whether triggering Article 50 requires an Act of Parliament. The claimants, who include fund manager Gina Miller, say it does. The government says the royal prerogative will suffice. What this means in practice is an executive act of Theresa May, the prime minister.

But why does it matter? And who will win?

The complete article is here

Higher inflation in the Euro Area is here to stay

The inflation rate for the Euro Area (flash estimate) was at +0.4% in September. It is the highest since October 2014. In August the inflation rate was at 0.2%. The core inflation rate was stable at 0.8%.
The explanation has to be found in the oil price profile. I explained that in a post in August (see here). Continue reading