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AB 2000 studies

Alain Boublil Blog


And if the world economy was doing better ?

Economists and their commentators have been shocked by the 2007crisis. None of them saw it coming, as the Queen of England one day noticed it. In order to regain their credibility, it was necessary that each of them finds a good reason to forecast the worse. If it was coming, they would be genius. And if nothing happened, everybody would have forgotten their pessimistic comments. Some went even further through numerology to find reasons to worry. Figure nine would carry misfortune. It occurred, of course, with the 1929 crisis. But after that, it is more disputable. The recession occurred from 2018 autumn until 2009 summer, had been generated by the first defaults caused by “sup-primes” a year before. It was not needed more thanten years after, during 2018 4th quarter, announcements were on the rise to forecast a catastrophe in 2019.

The end of last year has been really hurt by numerous worrying factors. Their main source was in the U.S. with the risk of a recession and mainly, the unforeseeable and destabilizing behavior of Donald Trump. Current growth cycle being unusually long, it would stop and the Federal Reserve through interest rates increase was going to put an end to it. That decision was highly criticized by the White House. For it, the traditional, but not written in the law, independence of the central bank, to the difference of Europe, had no reality. The debates created by recent appointments confirm that the issue is still present. This situation was made worse by the threat, uttered by the American president, of a generalized trade war with China but also with its neighbors, Mexico and Canada, and even Europe. International trade plays a major role in growth, what globalization detractors don’t seem to understand. The end of free-trade would generate a recession.

The Chinese economy was doing too well for a too long time. That couldn’t last forever. The diminution, without any statistical value, of few tenths of growth rate was interpreted as the signal announcing a deep unrest or an unavoidable recession. That judgment was not without some political ulterior motives. The growing influence of the Middle Empire, especially in the countries we used to call the Third World no so long ago, is not pleasing everybody. Chinese enterprises are also parading their ambitions. From suppliers, they could become competitors of the developed countries major firms. It was unacceptable. So, so-called experts were agreeing about the imminence of a crisis of the Chinese economy. First months results were also creating some trouble because they were impacted by the Lunar New Year calendar. The comparison with the corresponding months of the previous year was delivering worrying results without any economic reality. If, atop of that, a trade war was started with the U.S., the catastrophe was certain.   

Situation in Europe was not more reassuring. Uncertainties about Brexit, still actual, could make to fear a deep recession in the U.K. and a destabilization of continental economies whose growth was already weak for several years. The very accommodative policy of the European Central Bank, the heavy indebtedness of most of the states and the restricting dispositions of European Treaties were risking to depriving them of the support tools for their economies. To that, the rise of populism in several States and a major political crisis in France were adding threats. All the conditions were in place to generate a general fall of financial markets. In fact, the fourth quarter has known, almost everywhere a significant fall and some experts were even forecasting that 2019 will see a tumble. It was exactly the opposite which happened, as if worries at the end of last year were unfounded. During these last three months markets enjoyed a large rebound, which did almost offset lost ground.

To simplify and to exaggerate, these rules in favor in the Anglo-Saxon journalism to sale can very well apply to economics, especially when the purpose is to announce bad news. But the “economic science” is based in reasoning when the British philosopher Hobbes clearly explained a long time ago that “no reasoning, whatever is it, can reach to an absolute knowledge of facts”. We can see the whole significance in the U.S. It is not because an economic cycle is longer than in the past that it is going to end or the rate curb has been reversed that a recession is there. The Federal Reserve, without saying it, has aligned its position on Donald Trump’ ones and has renounced to its projects for 2019 to increase its interest rates. The president has understood that it was his warlike comments toward China about trade issues which had generated Wall Street worries. He cannot take the risk of a market crash a year before next elections. The stake of the current discussions is to find an agreement where nobody loses his face. Regarding that game, we can trust Chinese people, whose economy give signals of strength after the first months hazards. Shanghai market indexes have rebounded by 30% since the beginning of the year.

Europe could definitely do better but it seems being sure that it is not going into a more wrong condition in 2019 and that a major crisis is not coming at the horizon. The continent is confronted with the limits it imposes to itself regarding economic policy. Inflation has, for a long time disappeared. The intense competition between enterprises profits to consumers who benefit from stable prices along with a large choice of goods and services. But it harms employees, confronted with the pressure of countries inside the Union which don’t offer the same level of remuneration and the same social benefits. The monetary tool has lost most of its sense and its effects are different from what traditional theory had showed. A rate increase had, as an objective to slow internal demand, or even to provoke a recession as in the U.S. at the beginning of the Eighties, which permitted to reduce inflation. Today, this policy is without purpose. An interest rate reduction has not the symmetrical impact on activity. Instead of supporting productive investment, which is without purpose if a strong demand is absent, such rates cut rig on assets valuations, encourage corporate indebtedness to finance acquisitions or even share buybacks, what a Standard & poor’s study has put as an evidence regarding France, but the point is also true for the U.S. As European rules impeach to have recourse to a public expenditures rise, European States are devoid of tools to support growth, which has good reasons to stay weak. But nothing, among all these points, can generate a risk able to lead to a major crisis, especially when enterprises are improving their profitability and household becoming wealthier, even if this process carries inequalities.

The systematic pessimism is not a good remedy to cope with the threats and it is even counter-productive. It generates abnormal precaution behaviors which are not by nature able to cause catastrophes but which weight on everybody level of life. It is the case in Europe and especially in France. We see the consequence every Saturday on streets.      


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