Job polarization describes the structural deformation of the job market in which the share of jobs increases at the top and bottom of the skills ladder and decreases for middling jobs. In theory, job polarization is U shaped. Empirical data easily shows a decline in the share of jobs in the middle distribution (the bottom of the U), as well as an increase in the most skilled jobs (right side of the U). This J-shaped semi-polarization is symptomatic of an “upgrading” effect, i.e. the overall rise in the level of education and skills attainment. The left side of the U, in contrast, which represents the increase in the share of low-skilled jobs, is often less developed and sometimes non-existent. In France, job polarization is more or less apparent depending on the study
In the eurozone, current public debt ratios are much higher than before the Great Recession. A proper assessment of the risk that this entails should also take into account other changes in the economic environment, and in particular, the decline in long-term sovereign rates. This trend has accentuated recently, with long term interest rates in several eurozone countries dropping below zero. But the decline has been at work for a long time and has already produced major effects. On the chart, each point represents a member state. The x axis shows the country’s debt ratio and the y axis the interest charge paid each year on its public debt
The ECB delivered a strong message. The eurozone monetary authorities announced the implementation of a new series of monetary easing measures that went beyond expectations. The Frankfurt-based central bank largely wielded its policy tools by strengthening forward guidance, lowering the deposit rate, easing long-term lending conditions for banks and reactivating net securities purchases. Although the effectiveness of such measures remains uncertain, the ECB’s proactive approach was welcomed. Aware that certain policies could have some perverse effects, the central bankers are now demanding that governments use fiscal policy to pick up the slack for quite some time to come.
Market expectations were elevated but the Governing Council did not disappoint. The comprehensive nature of the package, with the introduction of state-dependent forward guidance, take away the need to envisage additional measures in the foreseeable future. ECB watching has been narrowed to monitoring the gap between inflation and the ECB target. Given certain negative side effects of the current monetary mix, which are acknowledged by the Governing Council, fiscal policy, where leeway is available, is now requested to step up to the plate, so as to foster growth and speed up convergence of inflation to target. The policy baton has been passed.
Business cycle indicators mostly disappointed during the summer months and ended up below the already subdued expectations. In July, both industrial production and orders fell sharply. This could be partly attributed to the early start of the summer holidays. In that case, an opposite effect can be expected in August. More worrying was the more-than-expected decline of the IFO climate index in August, as business conditions in trade and services fell sharply. It is a sign that the deterioration of the business climate is not anymore confined to only manufacturing, something which has been emphasized by the Bundesbank. But this was contradicted in early September by the PMI composite. The indicator was actually stronger than expected, as services growth remained solid.
For the first time since 2014, aggregated net income of the five largest Portuguese banking groups[1], which account for about 80% of the banking system’s consolidated total assets, was positive in 2018 (EUR 375 millions). Losses recorded in Portugal (EUR -14 millions) were more than offset by profits from international activities (EUR 389 millions).The assets located abroad of Portuguese banks have, on average since 2014, represented 13% of their total assets. In 2017, the simultaneous decreases in this proportion and the net income from international activities are, amongst other things, due to a valuation effect of assets accounted at their fair value
The latest economic indicators still send a mixed signal. The months pass but nothing seems to change. While GDP growth is declining (+0.2% q/q in Q2 2019 after +0.4% in Q1), activity in manufacturing remains subdued and the Purchasing Managers Index (PMI) of this sector is well below its long-term average. Conversely, the services sector resists and the PMI is globally in line with expectations. In this environment, headline inflation remains pretty far from the 2% target, and surprised to the downside. The core component of the CPI keeps oscillating around only 1% (+0.9% in July).
A general election will be held on 29 September, as the coalition between ÖVP and FPÖ fell apart in May. The ÖVP is likely to increase its seats in parliament, but probably has to turn to the FPÖ again to obtain a majority. The policy is unlikely to change and remains focused on budget consolidation and the reduction of the tax burden. The next government will be confronted with a less supportive economic environment. GDP growth is expected to slow to around 1.2% in 2020.
Private consumption is the biggest component of eurozone GDP: 54% in 2018. It is also more resilient to shocks than GDP. This characteristic is particularly important when activity is slowing. A key driver of household spending is real disposable income, which in turn very much depends on employment growth (wages also play a role obviously). Employment growth has been declining since the second half of 2017, which more or less corresponds to the peak of the eurozone growth. Judging by the employment component of the IHS Markit composite PMI, which is highly correlated with growth in employment, growth of the latter should continue to go down and hence weigh on consumer spending growth.
Our pulse indicators continue to send a positive signal: stability of the INSEE business and consumer confidence surveys in August, even a slight improvement in the composite PMI; a more important than expected fall in Q2 unemployment rate (-0.2 points, at 8.5%); a small but solid rebound in July consumer spending on goods (+0.4% m/m); a slight upward revision of the second estimate of Q2 GDP growth (+0.1 point, at 0.3% q/q), thus running at the same rate as in Q1.
The Governing Council has tasked Eurosystem committees to examine its monetary policy options. Given the insistence on its determination to act, Thursday’s meeting outcome was basically a pre-announcement of easing in September. Being aware of the importance of maintaining the ECB’s inflation targeting credibility, Mario Draghi was very explicit in expressing his dissatisfaction with current inflation and its outlook, adding that a highly accomodative monetary policy is here to stay for a long period of time.
The share of residential loans to individuals whose value at the origination represents more than 90% of the value of the property acquired continued to grow in the first quarter of 2019. This credit category then represented 4.5% of outstanding home loans compared with 4.4% in the previous quarter and 3.3% a year earlier. The increase in their weight in the first quarter of 2019 prolongs the trend observed since the low point reached at the end of 2009. It also goes hand in hand with the increase in the proportion of real estate loans whose value represents between 75% and 90% of the value of housing. The growing financial constraint of households is otherwise illustrated by the increase in the proportion of loans with a high loan to income ratio
Despite an increase in June, core inflation in the eurozone remains stubbornly low. The dispersion is significant between countries and between the expenditure components of the price index. Inflation is low for clothing and footwear, furnishings and household equipment, transport and communications. It is higher for housing-related items, restaurants and hotels, miscellaneous goods and services and recreation and culture Non-energy industrial goods price inflation is very low. Should this continue, it would imply that the acceleration of inflation which is the ECB is pursuing by renewed policy easing, has to come from services. However, research shows that it takes more time for services prices to respond to monetary policy and economic activity. Monetary accomodation is here to stay
Since the 3rd quarter of 2017, a year of strong economic growth, non-financial corporations’ margin rate* in the euro area has fallen steadily. In the 1st quarter of 2019 they hit their lowest point since early 2014, at less than 40% of value added. This trend echoes the increase in unit labour costs, which has resulted both from increasing wage growth and slowing labour productivity. Forming part of a wider pattern of slowing growth in the euro area over a number of quarters and with high level of uncertainty, this narrowing of margins reflects the difficulties companies are experiencing in passing higher costs through to prices. Underlying inflation remains particularly inert. If it continues, this narrowing of margins could affect trends in investment
Since the mid-1990s the Italian economy has seen a significant economic uncoupling, which has worsened since the 2008 financial crisis. Its difficulties include a level of productivity that is one of the lowest in the advanced economies, a demographic decline and a relatively inefficient labour market, which still excludes too many young people. Structural reforms were introduced under the government of Mario Monti, from 2011 on, bringing a recovery in fiscal and trade accounts, but it remains to be seen what the current government will now do.
Counter powers and institutional watchdogs have proved to be quite effective in stemming the government’s business-unfriendly measures and attempts to undermine the Rule of Law. This may pave the way for a more pragmatic and predictable policy stance. Meanwhile, owing to weaker external conditions, a soft landing of the economy is expected in the coming quarters whereas domestic demand should remain dynamic. Despite the lower risk of overheating, macro imbalances must be monitored: inflationary pressure is lingering and the twin deficits may widen even further. The banking system has recovered from times of trouble, and the softening of the bank tax (and other “emergency taxes”) provided significant relief for the business community.
The credit impulse picked up very slightly in May 2019 in the euro area for households whereas it declined for non-financial corporations. The annual growth of loans to private non-financial sector stabilized at around 3.3%. Demand for credit is expected to rise in the third quarter of 2019 across all loan categories, stimulated by the easing of financing conditions, except for home loans, for which lending conditions are expected to tighten slightly.
The months pass but nothing seems to change. Growth in the manufacturing sector is struggling to accelerate in a persistently uncertain international environment, while buoyant domestic demand is boosting activity in services. The stronger-than-expected first quarter performance sends a more optimistic message than economic surveys. Faced with a downturn in inflation expectations and the downside risks to the Eurozone’s economic scenario, the European Central Bank (ECB) has been proactive again. It is prepared to ease monetary policy further and the new measures have been set up much earlier than expected. Yet faced with stubbornly mild inflation and only limited manoeuvring room, the ECB is bound to take a frugal approach.
As international trade slows, the economy is mainly supported by expansionary fiscal and monetary policies and real disposable income growth. After a mild contracted in Q2, the economy is expected to grow modestly in the second half of the year. In 2020, exports may strengthen again and growth could return to close to potential. Due to its deep integration in global value chains, Germany is relatively hard hit by the global trade slowdown. This integration has undoubtedly brought benefits by improving productivity and skill-intensity. However, it has also accentuated income inequality.
The signs of stabilisation seen at the beginning of the year have been followed by improvements in confidence surveys. The upturn in consumer confidence has been the most marked and the most encouraging of these. The rather more mixed nature of the economic data available tempers these positive signals somewhat, and leads us to forecast stable growth in Q2, at 0.3% q/q, making this the sixth quarter in a row to see growth at around this pace. This stability, which is remarkable in and of itself, is likely to continue over the coming quarters according to our forecasts. It is a good sign of the resistance of French growth to downward pressures. Under our scenario, this resistance demonstrates a degree of effectiveness in the measures taken to support consumers and businesses.
In Q1 2019, Italy came out of recession. The overall scenario remained mixed. The GDP annual growth rate was negative. Imports strongly declined and exports slightly increased, with a positive contribution of net exports. Both households and firms remained cautious, postponing consumption and investment. Cyclical indicators suggest a disappointing evolution in coming months, making more challenging the fulfilment of public finance objectives. The Italian Government approved an update of the 2019 Budget, with the public deficit around 2% of GDP, reaching an agreement with the European Commission and avoiding the disciplinary procedure.
Spanish growth is still robust, but that does not mean it is totally immune to the European slowdown. Although growth is expected to slow this year, it should have no trouble holding above an average annual rate of 2%. After winning April’s legislative elections, Pedro Sanchez is still seeking a majority that would enable him to head the executive branch and form a new government. Spain officially exited the European excessive deficit procedure recently. Although a budget has not been formally adopted for 2019, the authorities are aiming for a primary surplus.
GDP growth is slowing due to the strong deceleration in global trade. Nevertheless, the economy continued to operate close to its potential until 1Q 2019 thanks to the strength of domestic demand, underpinned by strong disposable income growth and an expansionary fiscal policy. As the government has lost its majority in the Senate, it needs the cooperation of the opposition parties for passing new legislation. However, a government crisis is not imminent. Even if GDP growth is expected to slow below its potential in the coming quarters, public finance metrics will continue to improve up to 2020.
Over the next quarters economic growth will remain stable. Rising labour market capacity constraints and a lower contribution by net international trade are weighing on the overall outlook. With also uncertainties in the international (trade war, Brexit) and national (government formation talks) context unlikely to dissolve anytime soon, our base case is one of below potential growth up until 2020.
The economic recovery continues. Growth is accelerating and for the moment it has reached the lower range of expectations. After four and a half years in power, Alexis Tsipras passes on the helm to Kyriakos Mitzotakis, leader of the centre-right New Democracy party, which has led in the polls since 2016. The new Prime Minister is unlikely to call into question the prescribed public finance trajectory as the country exits the European financing programme.
