An enduring crisis (part 1)

The world was thrown into disarray by the financial crisis in 2008 as it was forcibly pushed out of its previous very definite state, with its own momentum and its own very effective endogenous systems of control. This previous world order drove the economic success of western countries, but the world must now find a new stable framework with a new dynamic and different systems of control. The structure for this new order still remains very unclear and while there are a number of potential options, the transition from this previous – and very familiar – state to the new ill-defined set-up makes for a time of crisis.

The certainties of the past are now being called into question, and the new world order is only just emerging, so the certainties of tomorrow are not yet fully formed. This situation makes for a crisis as the past world has gone, while the world of the future is struggling with seemingly – and sometimes actually – contradictory signs.

The world as we know it in 2019 is nothing like the pre-crisis world of 2007. Our reference points have all completely changed and this is highly disconcerting. So it comes as no surprise that more radical political movements have developed and are all very similar in that they hark back to the past to try to find their bearings. Our ability to imagine these changes creating an ultimately coherent environment where we can see ourselves living comfortably is shaped by anxiety and uncertainty, which drive our behavior.

Today’s crisis is multidimensional. It is obviously a source of disruption, but contrary to common belief, it is not necessarily characterized by financial watershed. The financial aspect is merely just another source of uncertainty and while it is probably the most impressive at the time, it is actually not the most difficult aspect to address. Rather it is our changing world that lies at the heart of everyone’s gloom – and this scaremongering is excessive and contrived.

We are witnessing a very diverse and extensive range of changes that have taken place in a fairly short space of time, and it is this vast array of change that can seem frightening.

Phenomenally fast technological change is creating a new and unprecedented situation, e.g. visual recognition, which impinges on personal freedom, and feelings of being just another anonymous user, useful only as a target for personalized in-app advertising. An incredible revolution is taking place at unparalleled speed, yet this transformation does not feel like it provides a major or sustainable improvement in our wellbeing. What recent innovation has contributed more to our comfort than the refrigerator? None.

The world is also changing massively for the middle classes. Polarization of the labor market means that work for highly educated and for unqualified workers is increasing – albeit in very different ways – while intermediate jobs for those with few or poor qualifications are decreasing, with innovation primarily driving this trend. This middle class played the lead role in economic growth during the three post-war decades of boom in France, but now they just feel like bit players. This feeling is further aggravated when these employees live far from large cities with less access to healthcare, education and other public services. Here again the context has changed and the future looks much more bleak for this group. However, this situation is not just specific to France, as the Deaton review in the UK also reveals startling inequalities. This does not mean that the situation is the same across the board, but rather we must entirely overhaul some of our projections as past trends will not continue into the future.

The world balance is also changing dramatically. The same manufacturing methods are now being used in both developed and emerging countries, so the size of the world labor market has increased considerably, and this is another factor fueling difficulties for the middle classes.

Yet there are other aspects to this change in scale for the world economy. Tension between the US and China was inevitable as the real issue at stake here is political leadership, pursued via technological domination. China very quickly and relentlessly made up its previous lag as a result of vast efforts in the country, and also perhaps because of inadequate public investment in the US. This now casts doubt over US leadership in innovation: given China’s size and its increasing contribution to world growth, the balance of power in this battle of wills is fairly even. China is also developing a new way of managing its dealings with the rest of the world via its Belt and Road Initiative for example, which harbors a highly political dimension. The country’s expansion does not depend on Washington, unlike the situation in the west since the end of the Second World War.

This situation means a reallocation of resources for the US – and all to the detriment of Europe. So Europe must now stand united: the UK’s current ill-judged move is set to have drastic consequences. The world will not go back to its pre-globalization state, unless walls are built between countries around the globe. China is powerful, making it a key partner in future choices on global systems of control, whether in terms of people, goods, services or capital. Three-party communication between Europe, the US and China is vital, and a Europe that fails to stand united cannot have any influence in this trio, which would be highly damaging.

Another aspect of China’s rise is the fracture in the world’s historical dynamics. The industrial revolution took place in Europe and then extended naturally to America, so the shift towards China marks a huge swing in the world balance. French historian Fernand Braudel’s economic history went from the Mediterranean to Flanders via the Champagne fairs before making it to London and then New York – maybe China will be the last stop on this trip.

This all makes for a radical shift in the world’s reference points, with the feeling of losing our bearings and our grip on the future. America was easily seen as a natural successor to Europe, with a full range of virtues, but the same cannot be said of China.

To be followed…

This column was posted on the French Forbes’ website. You can retrieve it here

What to expect next week ? (September 2 – September 8, 2019)

Highlights

> The global economy is slowing very rapidly and the world trade was contracting in June. To anticipate the immediate future on the economic activity, companies’ surveys are key. Next week, the Markit and ISM surveys will be released. On September the 2nd, manufacturing sector surveys for Markit will be out. The ISM will be out on September the 3rd. These number will highlight the short term momentum of the global activity and the future dynamics of world trade.

> On September the 4th the Markit service sector survey will be released and the 5th it will be the ISM survey on services. In the US, the services survey no longer re balance the weakness of the manufacturing sector. The flash estimate for the Markit survey is now below 51. Fragility leading to recession?

> US employment for August will be released on September the 6th. Recent numbers on jobs creation have been revised down (annual revision) leading to a lower dynamics. This change is consistent with the change in trend seen in the JOLTS survey.

> Industrial Orders in Germany for July (September 5) will be another source of information on the strength of the global momentum as this indicator has a profile consistent with the OCDE corporate investment. Recent data show a rapid slowdown.
> Recent developments in the Middle East with higher tensions, this week-end, between Israel, Lebanon and the West Bank. 

The detailed document is here
NextWeek-September2-September 8-2019

What to expect next week ? (August 26 – September 1, 2019)

Highlights

> GDP figures for the second quarter in the US (29), Germany (27), Italy (30) and France (29) will give details on the composition of growth in all these countries, providing a better understanding of the current situation. This will be particularly important at this stage of the business cycle, notably because there are fears of recession in Germany and Italy.

> Many surveys on economic activity. IFO in Germany (26), climat des affaires in France (27) and Business confidence in Italy (28). Risk of a weaker index in Germany and in Italy after the political mayhem seen in August.

> Consumer confidence in the UK (30), one month after Boris Johnson has been appointed as prime minister.
Consumer confidence in the US (August 27) will bring details on the labor market dynamics at a moment where the situation is changing in the US (Markit index for the manufacturing sector at 49.9 in August)
> CPI figures in the Euro Area for August and in the US for July that will bolster central banks in their will to become more and more accommodative.

The detailed document is available here
NextWeek-August26-September1-2019

The pace of the US labor market is changing

T he US job market has really changed pace in the past six months. It stabilizes but the trend is not on the downside yet. It will be for the second half of the year.
Households have the perception that the trend is no longer improving and the number of available jobs no longer increases. As growth slows, the job market will inevitably change pace. It will be interesting just a few months before the presidential elections

Solid US job report in June

The #US June #employment report shows that the drop seen in May (72 000) was temporary. The June figure was 224 000 and 191 000 for the private sector. The average for both measure is close to figures observed in 2016 and 2017. No necessity for the Fed to act rapidly. In 2017, the Fed was tightening smoothly.

On the wage side, the deceleration is rapid at 3.14% on a year (3.4% in Feb.). Graph shows that the Fed rate can manage a plateau as long as wages do not drop rapidly. This would be caused by a strong growth slowdown. It’s not the case yet. Therefore, nothing is expected on the Fed’s side in July.

What to expect next week ? (July 1 – July 7, 2019)

Highlights

  • The ISM index for the manufacturing sector (July 1) will be the main indicator in the coming week. The slowdown in the US business cycle may be confirmed in June. 
  • The US labor market is the other main indicator (July 7). Its dynamics has recently changed as it adjusts to the new business cycle shape.
  • The Markit indices for the manufacturing sector (July 1) and for the services sector (July 3) will show the risk of a global recession for the manufacturing sector. The hope for the Eurozone is a strong services sector index that will allow an extension of the growth momentum.
    The Tankan survey in Japan will be out on July 1.
  • Employment in Germany for June (July 1) and retail sales for May (July 3) will show the possibility of maintaining a robust domestic demand or if it is necessary to have a stronger economic policy to cushion the impact of world trade negative shock on the German economy.
  • Retail sales in the Euro Area (July 4) for May will be a good proxy on the strength of the internal demand for the Euro zone.

    The document is here NextWeek-July1-July7-2019