Macro Weekly – Stop Harassing Mr Draghi

by: Han de Jong

  • Business confidence in the US and the eurozone diverging?
  • Three risks to encouraging global picture
  • Masochistic attacks on Draghi
Macro-Weekly-25-August-2017.pdf (110 KB)

The global economy has done well in recent quarters, showing decent growth in all key regions. I have pointed out before that measures of business confidence are high but cannot go on rising. I was therefore surprised to see the eurozone Markit PMI for the manufacturing sector for August bouncing back up from 56.6 in July to 57.4. Surprisingly, the equivalent measure for the US declined from 53.3 to 52.5. These two series have shown divergence before this year with the US weaker than the eurozone. This divergence is hard to explain. It is either noise, or the result of the strong dollar during 2015 and 2016 or it is an indication that domestic demand growth in the eurozone is relatively robust.
The respective series for the services sector show the opposite picture in August: weaker in the eurozone and stronger in the US.

The idea that the eurozone economy is actually experiencing robust domestic demand growth is borne out by other economic variables released recently. INSEE’s measure of French business confidence in manufacturing for August rose to its highest level 2007. Germany’s Ifo index, which was at its highest level for decades in July, declined only marginally in August (115.9 versus 116.0), exceeding expectations.

Harder evidence came from the details of the German Q2 national accounts. GDP grew by 0.6% qoq, which we already knew. What we didn’t know was that private consumption expanded by 0.8% qoq, after 0.4% in Q1. On a yoy basis, consumption was up 2.2%. This may not sound very impressive, but it was the fourth highest monthly reading this century. Robust private consumption growth provides a solid backdrop to the overall economy as consumption growth is more stable than, for example, export growth.

Three risks

It is not difficult to come up with a very long list of things that could go wrong and spoil the party. But the way I look at things, there are three important risks for the economy. In random order: Trump, China and the normalisation of monetary policy.


Trump is a risk due to his erratic style of his leadership. Expectations that he was going to be good for the economy were high when he was first elected. These expectations subsequently fell, but that did not matter much as people realised the economy did not need big stimulus. More recently, Trump has developed the skill to unsettle financial markets with his erratic comments. This is not the place or time to dwell on this.


Another significant risk to the global economy is China slowing more than expected. In my view, China’s role in the strengthening of the global business cycle in 2016 and beyond is under appreciated. Equally, any meaningful slowing of Chinese growth could reverse that positive impact. It is not that I think a material slowing of Chinese growth is likely. It is just that I feel the chances are difficult to gauge and the consequences for the global economy could be significant. It bears watching.

Normalisation of monetary policy

The third big risk I want to highlight is the normalisation of monetary policy. I wrote about that last week. Recent days have seen some criticism of ECB boss Mario Draghi. Critics argue that he has been too macho, works too much exclusively with an inner circle while others argue the ECB has bought was too many bonds. Bear in mind that I am writing this before Yellen and Draghi are speaking at Jackson Hole.

I think the criticism at this particular point of time is unbelievable. It is certainly true that Draghi acted pretty much by himself when he gave his ‘whatever it takes’ speech in 2012 and again, when he deviated from his prepared text at the Jackson Hole conference in 2014. What are the results of these Draghi actions? First, the euro survived. It is easy to take that for granted, but it must have taken a lot of courage to do what Draghi did under precarious circumstances. In addition to the survival of the euro, the economy is now growing relatively rapidly while sustained outright deflation has been avoided and fears for it have eased. I cannot understand why people do not seem to be willing to give Draghi some more credit for this economic performance.

The criticism of the size of the ECB’s balance sheet and, thus, the size of its asset purchase programme is completely beyond me. Does anybody know with any sort of certainty how large such a programme should be in order to be successful??

I didn’t think so. This is unprecedented policy with no history to provide guidance. There is one thing that we do know and that is that if a central bank embarks on such non-conventional policies, the most stupid thing they can do is do too little. Put differently, central banks must prefer to err on the side of doing too much rather than doing too little.


What amazes me most about the criticism of Draghi is the timing. Draghi is the captain of a ship that has gone through very stormy weather and gale force wind. While the weather has eased significantly, the boat must now change its course and that may be as tricky as navigating through the treacherous waters. Why would you want to undermine the captain at such a crucial point in time? It looks like masochism to me.