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  • 2018/06/07
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A ray of sunshine for the economy?

The advantage of this column is that it never casts doubt on the news it provides. It takes note of what’s happening and tries to produce a recap; it recalls the facts, then assesses and compares them. And sometimes it has to face the harsh reality that the everyday life of an economy can be unappealing. Right now, markets are succumbing to a tidal wave of pessimism, heralding a summer that will be hot, tense and stormy. In sum, we no longer know which way to turn.

Le Figaro Economie has highlighted this rather edgy atmosphere by taking a look at the real-world situation. It cites political risks in Italy, the trade war unleashed by Donald Trump, the surreal state of Brexit negotiations, international tensions, and a forthcoming monetary policy shift by the European Central Bank. According to the newspaper: “Political turmoil in Italy and Spain, along with fresh tensions over world trade, have curtailed the springtime rally in European equities. The rise to power of the populist Five Star Movement and the far-right League has spooked the European equity market and put heavy pressure on the debt market.

“The entire investment world trembled last week, including on Wall Street, where bank stocks took a beating on Tuesday amid a steep fall in US bond yields. In Europe the Stoxx 600 index, which began May on a high, surrendered its gains to end the month 0.59% lower. France’s CAC 40, which had previously posted strong rises, slipped 2.21%.” These declines, plus increasingly widespread signs of a slowdown, is stressing economic experts.

There are indeed signs that the economy is slowing and that inflation is lurking. The gross domestic product of the US expanded 2.2% in the first quarter of this year, lower than the initial 2.3% estimate. Analysts are also expecting softer growth. And the OECD has lowered its 2018 forecast for the global economy.

Didier Saint-Georges, a member of the investment committee at asset manager Carmignac, commented: “The main issue over the next six months will be the macroeconomy. Numerous indicators are converging on the idea that the cycle is peaking. In the US, investment is no longer accelerating and consumption is faltering despite the measures taken by the Trump administration. The latest readings in Europe for GDP and purchasing managers’ intentions are subpar. And China’s economy is slowing. Which may be deliberate, but it’s a slowdown all the same.

If the deceleration takes hold, then the weakest economies will be in the firing line. It is true that the Nasdaq is widening the gap with other indices, as if to show that the old economy is doomed to instability. But another news item roiling the waters is that that the ECB is mulling a change of monetary stance. The next Governing Council meeting on 14 June will decide whether to halt the massive asset-purchase programme underway for the past three years. The time does seem right, even though businesses are still taking full advantage of low interest rates to step up their investments. We will likely see widespread feverishness, and definitely see a show of relative confidence in the future. Issues relating to the supply of new money will be hotly debated. The reason, ultimately, is that the possibility of expanding business activity, which has been recognised and encouraged, will produce results. Those results can quell the populist upsurge, remedy misguided policies, and assuage the tiny open wounds that are making markets so feverish. All that’s needed now is a ray of sunshine.

Christian Moguérou

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