Ecoflash

EcoFlash

    EcoFlash of 28 June 2022
    Once protected by the logic of “whatever the cost”, household purchasing power in Europe is now threatened by inflation. After the pandemic, public policies are being solicited once again to help reduce the loss of purchasing power, albeit without really succeeding. In 2022, the real disposable income of Eurozone households is expected to decline by about 2.5%. Consumption is still rising, but only because the household savings rate is declining, a trend that masks extremely diverse situations.
    EcoFlash of 08 June 2022
    In 2021, sales by foreign subsidiaries of Japanese industrial companies accounted for nearly a quarter of total sales. China is the main anchor country, particularly for the automotive industry. Despite this, Japan has retained a larger industrial base than most other OECD countries. The sector accounted for more than 20% of total national value added in 2021. The share of goods exports in GDP has also increased, reaching 16.4% in Q1 2022. This production structure for Japanese companies, based on the complementarity between domestic facilities and foreign subsidiaries, has helped support profits, which climbed to a record as a share of GDP in Q1 2022. Industrial production in Japan is continuing to shift towards capital goods and away from final consumption goods, largely in response to the increasing competition from other Asian countries in the latter segment.
    EcoFlash of 19 May 2022
    The sharp rise in energy prices since April 2021 has been the main driving force behind the current surge in Eurozone inflation. The outbreak of war in Ukraine on 24 February accentuated this trend, sending the energy component of the harmonised index of consumer prices (HICP) up 44.4% y/y in March 2022. Faced with this situation, the governments of the four main Eurozone economies under review in this article have acted to try to buffer the shock on economic players, and notably on household purchasing power, via direct subsidies, tax cuts, price regulations and measures to boost nominal incomes.  Although their actions have clearly helped ease the rise in energy costs, they have not prevented a loss of household purchasing power thus far in 2022, even though it is expected to be relatively mild. Moreover, they have not prevented inflation from spreading to other components of the consumer price index.
    EcoFlash of 28 April 2022
    The Spanish housing market is building momentum again after its deep correction between 2008 and 2013, which erased part of the excesses created over the early 2000s. In 2021, transaction volumes hit their highest level for twelve years. House prices have been growing at an average of 5% per year over the past six years. Housing activity is now benefiting from multiple sources of support: the post-Covid economic recovery, higher levels of household savings, growth in employment, low borrowing rates. Rising housing prices are driven by limits on housing supply, which are likely to persist, given rising construction costs as a result of higher materials expenses. A tightening of lending conditions would be less problematic than in 2008: household indebtedness and debt service have fallen significantly over recent years. However, these price increases are contributing to the rise in inequality in the country. The “right to housing law” bill, currently in discussion at the parliament, seeks to regulate various areas of the real estate market (better access to housing, regulation of evictions, increase in social housing supply, rent controls), but this will only partly address the problem of a shortfall in building.
    EcoFlash of 03 April 2022
    Countries neighbouring Russia and Ukraine are more exposed than those in Western Europe. Among the latter, there are differences, with Germany and Italy being more dependent on Russian gas than France, Spain or Portugal. The countries that import the most from Russia are also the most dependent on Ukrainian imports. The exposure of European countries to Russia and Ukraine, and their vulnerabilities to the economic repercussions of the war between these two countries, result primarily from the high weight of their imports of Russian energy supplies and Ukrainian food and agricultural products. European countries are exposed to and penalized by the rise in prices of these products (caused by the conflict, which is a source of additional inflation), the slowdown in trade and the risk of supply disruption.
    EcoFlash of 29 March 2022
    In France, the year 2021 ended with the highest employment rate since the 1970s, the lowest jobless rate since 2008, and a record number of job creations since the Second World War. Half of the labour market’s dynamic momentum can be attributed to the rebound in job creations in the sectors hit hardest by the Covid-19 crisis (notably catering and temporary employment services). The pandemic has also bolstered employment in healthcare and education.  Yet the private market sector still bears the marks of the health crisis: employment is 1.3% below the level that it would have reached had the growth rates observed in 2017-19 continued through the end of 2021 (using the same calculation method, real GDP growth is still lagging by 2.2%). The employment rate for the 15-64 age group rose to 67.8%. This increase is mainly due to the employment rate for the 50-64 age group (later retirement age). The recent improvement in the employment rate for the 15-24 age group must still be confirmed. Wage growth has been moderate in recent years but should accelerate in 2022 under the combined impact of a declining unemployment rate and higher inflation.
    EcoFlash of 24 March 2022
    Although the war in Ukraine is casting shadows on the global economy, the Federal Reserve announced that it would rapidly normalise US monetary policy.  The Fed’s main arguments for taking action include surging inflation, which is also spreading widely, as well as tight labour market conditions and tensions over wages. As the self-sustaining nature of price increases is still open for debate, the projected tightening of monetary policy looks surprisingly strong. In an economic environment accustomed to cheap borrowing costs, the Fed’s move is not without risks regarding the future path of activity.
    EcoFlash of 14 March 2022
    According to insolvencies and corporate margins figures, the situation of French companies has improved significantly between 2016 and 2021. Business insolvencies are down roughly 50%. According to our estimates, this has contributed to save 210,000 jobs over the period, including 170,000 jobs during the pandemic alone. Corporate margins have improved by 1.4pp during the last five years and taxation has decreased. Public finance support has been a key driver of this improvement, including through lower corporate and production taxes and, during the pandemic, higher subsidies to production. In 2022, this improvement should reverse partially, mainly because of higher inflation. Higher commodity costs are expected to slash nearly 1 percentage point off corporate margins on average, although they should have a much bigger impact on margins in transport services, the agri-food industry and construction. These costs will hurt companies at a time when they are engaged in significant but costly investments. French industry needs these investments to close the gap in terms of production capacities, without which it would continue to be at a disadvantage relative to its European competitors. 
    EcoFlash of 10 March 2022
    Abundant job creations in the Eurozone helped bring down the unemployment rate to a historically low level in 2021, but this has also led to hiring difficulties and labour shortages. Labour shortages seem to be having the most restrictive impact in Germany (in all sectors), given the already low unemployment rate. They seem to be weakest in Italy where the job market is less dynamic, and this hierarchy was confirmed regardless of the sector. In France, labour market tensions are the highest in the construction, and comparatively less important in the manufacturing and services sectors. Production constraints due to labour shortages have reached a record high in the services sector, especially in Germany. Labour market pressures can be seen as a good sign, as the corollary of the rapid recovery in growth and employment. Yet they must be monitored for two reasons: they can constrain production and fuel inflation.
    EcoFlash of 24 February 2022
    Purchasing power is a major concern for French households, a hot topic that is currently acute. For the first time since 1989, inflation is expected to rise above the 3% threshold for most of the year 2022. Aggregate household revenue is growing at a dynamic pace, offsetting the observed inflation impact. Purchasing power has increased by 2.3% in 2021 and a slight gain at 0.2% is even possible in 2022. Strong job creations have bolstered the total disposable income of French households. Looking at the average compensation, purchasing power has increased by 1.1% in 2021, but is expected to contract by 0.6% in 2022. Differences in household situations are strong, especially as non-discretionary expenditures (rent, energy) have increased, resulting in cutbacks in households’ discretionary income, i.e. the income left over that they have to live on. The purchasing power of discretionary income has increased by 1.8% in 2021 but may decline by 0.8% in 2022 according to our forecasts.The question of purchasing power gains over the long term can be looked at by comparing the structural dynamics of inflation and wages. Inflation has eroded the purchasing power of low-income households because wage growth declined.  

On the Same Theme

Unwarranted spread widening: measurement issues (part 2) 6/27/2022
A lasting, unwarranted widening of sovereign spreads in the euro area would represent an excessive tightening of financial conditions and weigh on activity and demand. It would run into conflict with the objectives of the ECB in the context of its monetary policy normalisation. Spreads are influenced by various fundamental variables that are directly or indirectly related to debt sustainability issues. These tend to be slow-moving. Sovereign spreads also depend on the level of risk aversion, a variable that fluctuates a lot and which is influenced by global factors. This complicates the assessment of whether an observed spread widening is warranted or not.
Unwarranted spread widening: measurement issues 6/19/2022
In recent weeks, the prospect of several ECB rate hikes has caused an increase in Bund yields and, unexpectedly, several sovereign spreads. Beyond a certain point, higher spreads may become unwarranted. Under such circumstances, the ECB might consider stepping in to avoid that its policy transmission would be impacted. Determining whether sovereign spreads have increased too much is a real challenge. Historically, based on a 20-week moving window, the relationship (beta) between the BTP-Bund spread and Bund yields fluctuates a lot, so this calls for taking a longer perspective. Using data since 2013, the current spread is in line with an estimate based on current Bund yields. Clearly,  other economic variables should be added to the analysis. It shows the complexity of the task should the ECB commit to address unwarranted spread widening.
ECB meeting of 9 June: preparing for lift-off – towards neutrality or beyond? 6/6/2022
At its 10 March meeting, the ECB paved the way for raising its key deposit rate, although the timing of the first rate increase remained uncertain at the time: the odds of a September move had declined compared to a few weeks ago and July was excluded, which left December. The wait-and-see approach still seemed appropriate given the increasing downside risks to growth, aggravated by the current inflationary shock, the war in Ukraine and China’s zero-Covid strategy. Yet economic data reported in the meantime, as well as the hawkish tone of several ECB members, seems to have accelerated the tempo. Concerning data, it is the combination of high inflation, a weak euro and relatively resilient growth that has moved forward the lift-off date.
Let's talk about climate change, often 6/3/2022
Climate change and the energy transition are high on the European agenda. Last year, 'Fit for 55' was presented, a plan to deliver the EU's 2030 climate target on the way to climate neutrality and to reduce greenhouse gas emissions by at least 55% by 2030. Following the war in Ukraine, REPowerEU was launched, with the ambition to rapidly reduce dependence on Russian fossil fuels and fast forward the green transition. These initiatives imply that millions of households and businesses will need to make  investments in order to save energy and use alternative energy sources.
Energy price inflation in the Eurozone: government responses and impact on household purchasing power 5/19/2022
The sharp rise in energy prices since April 2021 has been the main driving force behind the current surge in Eurozone inflation. The outbreak of war in Ukraine on 24 February accentuated this trend, sending the energy component of the harmonised index of consumer prices (HICP) up 44.4% y/y in March 2022. Faced with this situation, the governments of the four main Eurozone economies under review in this article have acted to try to buffer the shock on economic players, and notably on household purchasing power, via direct subsidies, tax cuts, price regulations and measures to boost nominal incomes.  Although their actions have clearly helped ease the rise in energy costs, they have not prevented a loss of household purchasing power thus far in 2022, even though it is expected to be relatively mild. Moreover, they have not prevented inflation from spreading to other components of the consumer price index.
The Eurozone: inflation, stagflation, recession? 5/18/2022
The inflationary surge since 2021 has turned into an inlflationary shock, fuelling fears of stagflation an recession. For Hélène Baudchon, however, there are reasons to temper concerns.
Inflation and the sustainability of public sector debt 5/15/2022
At first glance, higher inflation seems like good news for governments. After all, inflation erodes the real value of debt and lowers the public debt/GDP ratio through a higher nominal GDP. However, the impact of inflation on public finances depends on whether higher inflation was anticipated by financial markets and on its expected persistence. Both factors would influence the borrowing cost and hence the dynamics of the debt ratio through the difference between this cost and nominal GDP growth. Public finances should benefit from having a central bank that is credible in its ability to keep inflation expectations well anchored and is not afraid of tightening policy when inflation has moved well above target. In the euro area, higher Bund yields cause higher sovereign spreads, reflecting a higher risk premium, which in the longer run will worsen the dynamics of the debt ratio. It implies that fiscal policy also has a role to play by keeping the debt ratio under control.   
Wage-price loop: low risk but one to watch 5/13/2022
One of the economics themes currently being debated, the possible start of a wage-price loop is a cause for concern. However, at first and under normal conditions (which, it is true, is not the case right now), a wage-price loop is not a problem in itself.
Eurozone: how worried should we be about recession? 5/9/2022
In the space of just a few months, growth prospects in the eurozone have deteriorated markedly. So much so that the risk of a recession is looming this year. Between our growth forecast from early 2021 – when it peaked at 5.5% – and our current scenario, drawn up in mid-March 2022, expected growth has been about halved; we now expect a figure of 2.8%. As recently as November 2021, we were still forecasting 4.2%. This figure of 2.8% still looks very high, as it is well above the long-term trend rate of 1.6% per year on average between 1996 and 2019. However, it relies on an exceptionally high growth carry-over of 2.1% in Q1 2022 and, for the subsequent quarters, on projected weak but positive growth. However, since mid-March, downside risks have increased, particularly due to the amplification of the inflationary shock, and the probability of a recession has increased.
ECB: the weaker euro, a blessing or a headache? 5/1/2022
At first glance, the significant depreciation of the euro looks like a blessing for the ECB. Via its mechanical effect on import prices, it should remove any remaining doubt about the necessity of hiking the deposit rate. However, upon closer inspection, there is concern that the weaker euro, through its effect on inflation and hence households’ purchasing power, will weigh on growth. This would warrant a cautious approach in terms of policy tightening. On balance, a deposit rate hike in the second half of the year looks like a certainty, but the real question is about the scale and timing of subsequent rate increase. This will depend on how the inflation outlook develops.  

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