#Point of view
Is the Economy Looking Rosy or Raising a Red Flag?
Market psychology is not an exact science. It’s tricky to teach and sometimes, let’s be frank, hard to make sense of. It’s as if the economy had its own agenda, an active subconscious, an interior monologue that is both powerful and quiet.
The business daily Les Echos reported Wednesday that the Paris stock exchange had settled above 5,000 points, “relieved by the agreement in principle reached in the United States that reduces the threat of another government shutdown.”
This would mean that Valentine’s Day in France would be bright and sunny, with more than tolerable temperatures for mid-February. So has the economy has suddenly become rosy, after weeks of uncertainty and stress from political risks? That would certainly be jumping to conclusions—love isn’t particularly bankable.
According to Les Echos’ lead story, “European exchanges are trying to catch up with Wall Street” and “European equity investors are finally perking up,” although banks are still not back in markets’ favour. “Banking shares have not recovered from the 2009 and 2012 crises, despite a rebound in profits”. The article goes on to say that, according to a Bank of America-Merrill Lynch poll, “along with chemicals, services and manufactured goods, banks are the most underweight sector in European portfolios (nearly 20% of portfolios are underweight on a net basis, which is the difference between investors who underweight banks and the others), and things got worse between January and February.”
Markets appear to be back in high spirits, but not all sectors are benefiting in the same way, which partly explains why Europe is still lagging Wall Street. At the same time, Ireland’s Philip Lane, the finance ministers’ pick for chief economist of the European Central Bank, will play a significant role in shaping the ECB’s monetary policy. In the UK, the news was received without comment. But don’t forget that it was England that made Valentine’s Day an official holiday in the 14th century, when the country was still Catholic. The day was considered to be a celebration of lovers because, according to popular belief, it was when birds chose to mate.
However, the UK economy is looking more red than rosy. Growth lost steam as expected in the fourth quarter, dipping to 1.4% overall for 2018. This was the weakest level in six years according to data released Monday by the Office for National Statistics (ONS). The daily Le Figaro made a cold analysis of the slowdown: “GDP growth came in at 0.2% between October and December, after rising 0.6% in the third quarter. This figure is in line with economists interviewed by Reuters, but a bit lower than the Bank of England’s most recent projections. "GDP slowed during the last three months of the year, with a sharp drop in vehicle manufacturing and steel products, along with a slump in construction,” reported Rob Kent-Smith, an ONS statistician. Fourth quarter growth on an annual basis stood at 1.3%, compared with an expected 1.4%. In December alone, GDP shrank by 0.4%, the worst performance since March 2016. Le Figaro added that “1.4% growth for all of 2018 compares to a rate of 1.8% in 2018. Exports suffered from the worldwide slowdown in growth while Brexit uncertainties put the brakes on household consumption and business Investment.
“The Bank of England has slashed its growth projections for this year by half a point to 1.2%, the weakest rate since the 2009 recession.”