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AB 2000 studies

Alain Boublil Blog


2018 : The bad vintage

Even if no major financial crisis has occurred during the ending year, it will remain everywhere as a bad vintage. The major financial markets have made this analysis and have heavily fallen during the fourth quarter. For several months, the exceptionally long duration of the economic cycle which followed the 2007-2008 crisis had surprised. Many experts had announced its end and predicted a new serious financial crisis with their eyes oriented toward China and consequences on the whole planet. That did not happen but there is unanimity to note that the world has become more fragile and that every country without exception is facing difficulties.

The Middle Empire has not been saved in 2018, even if the crisis, so frequently announced has not occurred. A 6.7% growth during the first three quarters of the year remained slightly above the 6.5% official objective but the confirmation of this number for the whole year by government experts means that 4th quarter will have been significantly lower. Its publication in next January risks, if confirmed, to be very badly welcomed and interpreted as the consequence of trade tensions with the United States. The Chinese government numerous signs of goodwill, as the lowering of some duties and the support brought to high quality products imports will not occult that the country registered a trade surplus above 300 billion dollars in 2018 and that this one should not significantly fall in 2019. The three priorities for the future, set by president Xi Jinping, the reduction of financial risks, the fights against poverty and pollution, are showing the necessity to transform the China growth model because it has reached its limits in 2018. The growing contrast between the north of the country, confronted to the restructuration of heavy industries and the redeployment in the regions which are living from the exploitation of coal mines, and the “New California” in the south, young and dynamic, could become a threat to China stability.

The United States situation is different but it is more worrying because it reminds to us that one we observed ten years ago, just before the great recession. People were amazed by American growth but that one was precarious and an illusion. Production increased but the goods and the services were not paid. They were financed by household massive and excessive indebtedness. Today, debt is mainly carried by students and car buyers but it is not high enough to generate a systemic risk as ten years ago. Unbalance is somewhere else and lies in the budget deficit increase. Even though the American economy was experiencing a long period of growth, the Trump administration has chosen to artificially extend it through a public expenses increase and massive tax cuts. At the same time, the Federal Reserve was tightening monetary policy through interest rates increases. It is exceptional to observe that the two arms of the economic policy are acting in opposite directions. The gap between American growth and the slowing observed everywhere has contributed to increase the country trade deficit. At a moment when Donald Trump was blaming multilateralism and launching a protectionist policy, his country was becoming more and more dependant of foreign ones to finance its deficits. American policy contradictions were appearing in broad daylight along with the divisions inside the administration. The toughening of the opposition between the Congress and the White House has provoked the shutdown. All these elements constitute for the future a major instability factor for the world economy, probably more important than the trade dispute with China.

Europe also went through a quite bad year in 2018.There was first the incapacity to find a solution to the Brexit. The Irish issue seems to be insolvable. The status quo between the two parts of the island in order to avoid the creation of a border is hurting the existence of the United Kingdom because within it, two territories would be submitted to different international rules. The opposite solution is destroying the laborious compromise which, twenty years ago, had allowed to bring back peace. No solution has been found which would be acceptable for the concerned governments. The Union is, itself, confronted to an unprecedented trust crisis. Each election has been the occasion of a progression of the political parties which contest the way it is managed and even its existence or which openly show their opposition to the value on which European Union was founded. The eurozone major economies are not anymore in the position to fix a direction. Italy appointed a government including two political parties which are openly hostile to the European project. To the opposite, Germany has just kept leaders supporting the project but the majority is weakened and every election is confirming that trend. Regarding France, which was the main engine in favor of a strengthening of Europe, the crisis which hurts it for almost two months has weakened its position and has not allowed it to keep this role. The only positive point in 2018 has been the confirmation of the recovery of two of the countries which were among these at the origin of the euro crisis, Spain and Portugal. But it is not going to be enough. If, everywhere, to justify the difficulties facing a country, political leaders are blaming Brussels, it is not surprising that the discontent movement increases in every country. But that is not always without reason.

To the opposite to the United States and China, and despite the uncertainties which are weighting on their economies, European countries have never recovered a lasting and strong enough growth rhythm to neutralize critics and to prevent people discontent. Apart the year 2017, Europe growth as a whole has never exceeded 2%, i.e. twice or three times less than the U.S. and China. In 2018 the situation became worse. The ultra accommodative policy of the ECB has not been enough. The compliance with Maastricht Treaty criteria has impeached several countries to decide to support their internal activity. The case of France is an example. For five years, the thrust of the economic policy has consisted in increasing enterprises margins through tax and social charges cuts. But in order to comply with European Treaties and to compensate receipts losses, the country had to increase levies on households and reduce social benefits and wages. Internal demand and growth were curbed which has obstructed any substantial improvement of the job market. The deep discontent which arose during this autumn and which is going to have serious consequences on the economic activity is not without link with that policy. European elections which will come next spring, would once more register a strong upsurge of anti-European political parties.

Worries about Chinese growth stability, unbalances and contradictions of the American policy, weakening of the European project and political crisis in France, so are the outstanding facts of the ending year. It is not surprising financial markets took all the consequences of that situation, especially when no credible answers are seen for 2019.                


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