Eurozone growth painfully above 1%

GDP growth in the Euro zone is 1.2% (annualized rate) since the last quarter of 2017.
The figure of 0.2% (0.75% annualized rate) for the third quarter of 2019 does not change this trend. The carry over for 2019 at the end of the third quarter is 1.1% and growth over the year will be around 1.2% at best.
 After the catch-up in 2017, the economy of the Euro zone no longer has the capacity to accelerate. What does one do with the German budget surplus?Can we use it and put in place a more proactive fiscal policy in order to lock in a higher growth trajectory? See here in French

The Fed lowers its benchmark rate but stop there

The Fed lowers its benchmark rate to 1.5-1.75%. It says it wants to take a break. It downplayed expectations of another cut this year. The three drops this year are consistent with the September dots’ graph. Now the real rate of the fed is negative while the unemployment rate is at 3.5%. Always a very strange configuration.

We are waiting for the press conference to find out what Powell will say about the money market, which is not stabilizing. There is a real concern.

On this latter point, the message from Powell was clear. Stay away, it is not your business. It’s a bit scary, isn’t it ?

France – Robust but unenthusiastic growth

GDP growth in France was 1% in Q3 versus 1.1% in the first quarter and 1.4% in the second (annual rate). The carry over for 2019 at then end of the third quarter is 1.2%. If growth is again at 1.2% in the last quarter then GDP will have grown by 1.3% on average over the year after 1.7% last year. The chart shows a rapid rise in activity since the beginning of the recovery in 2013 with a trend at 1.45%. We also note the particular character of the year 2017 during which the expansion had an exceptional character (2.4%). Since the last quarter of 2017, the annualized average growth is only 1.25%. It is this figure that is probably closest to the capacity of the French economy.

Domestic demand is at the heart of this expansion, while foreign trade contributes negatively. A sharp rise in imports was observed while exports continue to grow. The rise in imports comes after a negative figure in Q2. There is a catch-up effect.
The rise in consumption has been stable on average since the beginning of the year at around 1.2%. It was at 1.3% for Q3 to compare with 1.5% in Q1 and 0.9% in Q2. Investment rose 3.8% after 2.1% in Q1 and 5.1% in Q2. These two components are at the heart of French growth. Note the continued growth of business investment despite a mediocre international environment. This may result from the temporary improvement of margins (double CICE effect and lower expenses in 2019) and a proactive economic policy in 2020 to support domestic demand. It is most encouraging. The slowdown in housing investment is worrisome but in line with what is happening in the private real estate market. The market is less dynamic with housing starts declining.

This internal dynamic reflects the economic policy that supports domestic demand to limit risk on growth. The increase in purchasing power resulting from the various bonus and the drop in the housing tax and the increase in employment, that will be seen again in the third quarter (November 8), are as much support for this internal demand. This promotes business investment.
The dynamics of the economy is not excessive. There is no strong upside on growth however the risk of rupture is limited. This is essential in a risky international context

What to expect this week (October 28 – November 3)


> The Fed’s meeting with a press conference and a press release on Wednesday. Two questions: are disagreements between FOMC members remain as high as in September ? Will the Fed cut its target rate ? The dots graph suggests a third cut this year.

Christine Lagarde will replace Mario Draghi as president of the ECB next Friday. The balance between politics and economics will be different than in the current mandate. The main task for Christine Lagarde will be to maintain the cohesion of the ECB members at a moment where the monetary policy is already very accommodative and the impact of a change will be questioned and lower than in the past.

On the Brexit side, a vote is expected today on the possibility of general elections on December the 12th  Boris Johnson will probably not have the qualified majority for it.
The EU, in a draft, has proposed an extension of the Brexit until the end of next January.

> GDP figures will be released this week in the US and in France (30) and in the Euro Area, Italy and Spain (31). Expectations are on lower figures than in the second quarter. This would be consistent with the business surveys seen during this third quarter.

> ISM index for the manufacturing sector (November 1) will be key to anticipate the business cycle profile in the US. The index was below the 50 threshold in August and September.

> The Chinese official PMI index (31) and the Markit index for the manufacturing sector (1st )

> The Markit indices for the manufacturing sector will be released on November the 1sr except on Continental Europe.

The US employment report next Friday. The momentum is lower than in the first part of the year even with a very low unemployment rate

Inflation flash estimates will be released in Europe this week. (Euro Area 31). As the oil price is on average lower than in September (53.7 € in October vs 56.7€ in September )  and has to be compared with a high level in October 2018 (70.3€). The energy contribution will be strongly negative and the inflation rate will be probably below the 0.8% seen in September.

The document is available here


What to expect this week (21 October – 27 October 2019)


> The ECB meeting (October 24) will be the most important event of the week.
During last meeting, the ECB adopted a very accommodative monetary policy stance. This led to important discussions notably on the resumption of the QE and on the forward guidance as these measures will remain until the EA inflation converges to the ECB target. Nothing new is expected?

> This meeting will be the last for Mario Draghi. He will quit the ECB at the end of this month and be replaced by Christine Lagarde. Draghi has given to the ECB the soul and the instruments that are necessary for an independent and influential central bank (more details on Draghi’s impact on the ECB in the document).

> Many corporate surveys for October will be released during the week. The French “climat des affaires” (23), the German Ifo (25), the Markit flash estimate (24) and CBR orders in the UK (21)
The current mood in developed countries is pessimistic and this will not reverse rapidly. The IMF forecasts was a synthetic view of this backdrop.
A Brexit deal would have had a positive impact but the Parliament has not allowed for it. BoJo has ask for a new delay until the end of next January. This increases uncertainty as we don’t know what will happen in the next three months. Do we converge to a new referendum ? Will Bojo force the Brexit before the end of next January ? Will there be general elections ? No one knows. Many would like to write the future but the recent past has shown that the foreseeable future is not predictable.
There are uncertainties also coming from the discussions between China and the US. Discussions, last week was mainly on agriculture as there is a necessity for the US to reverse the trend coming from the trade war. China now buys soybean in Brazil rather than in the US. This weakens Trump future presidential campaign. The risk associated with this negotiations’ failure is a source of supplementary weakness. The uncertainty for the future is still high and is a constraint for the economic activity.

> Durable goods orders in the US for September (24).
These numbers have not been strong recently and could reflect a weakness in corporate investment in coming months.
> Existing homes sales in the US for September (22)
This statistic is important as it reflects a kind of wealth effect. Thera are more house owners in the US than people having a large portfolio of risky assets. Movement in the real estate has therefore more impact on consumers’ behavior than the stock market can have. The existing home sales is for me the most important statistic that shows this wealth effect. Recent improvement was supportive for consumers’ expenditures.

The detailed document is available here