Macro Weekly – What is needed now is counselling

by: Han de Jong

  • Article 50 invoked for Brexit
  • Eurozone inflation falls back
  • US inflation continues trend up
  • Confidence data mostly stronger, again
Macro-Weekly-31-March-2017.pdf (392 KB)

The UK Prime Minister, Theresa May, kicked off the formal Brexit process by writing a letter in which the UK invokes article 50 of the EU Treaty. This promises to be interesting but one wonders how well prepared both sides are. It is clearly in everybody’s interest that the process is as smooth as possible and that a reasonable deal is done. My reading is that there is far too much emotion involved on either side to get to a reasonable deal any time soon.

The UK PM suggested that, in the absence of a satisfactory deal, cooperation in the area of security may be negatively affected. Such remarks are not helpful. Nor is the EU’s apparent approach that the first thing that needs to be done is agree on an amount of money the UK needs to pay for future liabilities. Suggestions that the exit bill may be in the region of EUR 50 bn are doing little to create a constructive atmosphere. And what about Donald Tusk whom I heard say on the radio that the EU is not out to punish the UK because leaving the UK is already punishment enough? Exactly, not helpful.

Get to grips with emotion

This expression of emotion makes me think of a problematic divorce. The two partners have been fighting for some time and some crockery and furniture has not survived. The partners have, finally, decided to part ways. What they do next is claim part of their collective possessions (and debts). ‘I want the family home; you will have to move out’. It is unlikely that sensible deals can be reached in such an atmosphere. So I would argue that negotiators should not consult with economists and lawyers, but with psychologists, counsellors and mediators. The sooner they are able to take the worst emotions out of the process the better.

I was in the UK a few days ago, talking to various groups of colleagues and clients. Of course people expect an economist to say something about Brexit. The economic effects of Brexit are highly unpredictable. We do not know what the future relationship of the UK will be with the EU. Nor do we know what policies the UK government will pursue. I thought it would be a good idea to offer complete transparency so that people could put whatever I would say into perspective. I am a committed European and I am actually in favour of a federal Europe. When I said that, I could see some of the people close their eyes in despair. That, again, shows the degree of emotion involved.

It is possible to limit the damage

Depending on the new relationship between the UK and the EU, Brexit represents an example of what economists call economic disintegration. And economic disintegration is damaging, it really is as simple as that. So my basic idea is that Brexit is disadvantageous for both sides. That is only the starting point, however. By reaching a good trade deal and by implementing the right policies, this damage can be limited. In addition, Brexit is not only, or perhaps even not primarily about economics. It is also about politics and sometimes there is an economic price to be paid for achieving political objectives.

I expect the negotiations to be relatively messy, certainly in the early stages. Only when the negotiators gat to grips with their emotions will real progress be possible. To be continued…

Eurozone inflation data supportive of the doves

Eurozone inflation has fallen back sharply in March: 1.5% yoy, versus 2.0% in February. This was to be expected and is largely due to the effect of the oil price. Having said that, core inflation also eased in February: 0.7%, down from 0.9%. The data shows that inflationary pressures are still very subdued in the eurozone and that what is needed is continued robust economic growth to reduce the output gap. The ECB is committed to continue its current QE programme until the end of the year. A discussion is going on about whether the ECB should perhaps change its plan and stop earlier. The March inflation data does little for the hawks and only provides more ammunition to the doves that it is far too early materially to reduce monetary stimulus. The ECB is actually going to reduce the amount of its monthly purchases in April.

Confidence mostly better, yet again, but not all

I have recently written extensively about the strength of the confidence data around the globe. And I will do so again today as there has not been much in the line of hard data recently. The confidence data cannot continue to improve indefinitely. Even if the economy does not slow down significantly, such indicators will either level off or start to move lower at some stage. The crop of recent days is mainly positive, but there were a couple of indicators that did not move up further. The eurozone’s index of Economic Sentiment eased marginally in March, falling from 108.0 to 107.9. I suppose you can say this indicator is levelling off as it has been more or less stable for four months. A number of other confidence indices in Europe have strengthened further. Germany’s Ifo index rose to 112.3 in March, up from 111.1 in February and is at its highest level since 2011. Dutch producer confidence also strengthened in March, up from 7.8 to 8.0, its highest since early 2008.

Chinese national PMI series edged higher in March. The manufacturing index moved up from 51.6 to 51.8, while the index for non-manufacturing rose to 55.1, up from 54.2.

According to the Conference Board’s gauge consumer confidence rose to its highest level in 16 years in March. That did not totally tie in with personal income data. This data showed a mom increase of just 0.1% in February, but the consumer apparently decided to dip into savings and increased spending by 0.4% mom.

Regional business confidence indices showed a mixed picture with business confidence in the Dallas region easing a little in March, but rising on the Richmond area, while the more authoritative Chicago PMI also managed to move up in March: 57.7, versus 57.4 in February

US inflation continues to rise. The PCE index was up 2.1% yoy in February, the highest since 2012. The core measure was up 1.8% yoy, the same as in January. The latter is the Fed’s preferred measure. The data suggests that inflation pressures are rising modestly, nothing to get worried about, but neither is it to be ignored.

No change of view

I see no reason to change my view that the global economy is gaining momentum, that that is obvious from confidence indices, that hard data is lagging but will catch up and that inflation will move higher, particularly in the US, but not at an alarming rate.