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At a time when world trade is flagging – for reasons that are as much structural as cyclical – and when it is no longer a growth driver, households continue to be growth's chief pillar. They consume and they invest. Following a period of deleveraging, the improving labour market, the steady – if sluggish – rise in wages, positive wealth effects and low inflation – which is driving gains in purchasing power – constitute a series of fundamentals that, so far, is proving resilient.
Although the drivers do not all have the same power, they should nevertheless allow both the US and European economies to grow at a rate of 1.6% in 2016. That rate is respectively close to and much higher than those economies' potential growth rates of 1.6-1.7% in the US and 1% in the Eurozone. That said, we cannot see any recovery in productive investment, which is clearly not at the level we could have hoped for. It is also futile to hope for a sharp increase any time soon in what (in the olden days…) used to constitute a ‘growth engine'.
On 4 August, the Bank of England lowered its key policy rate by 25bp to 0.25% as a response to the expectation of a Brexit-induced weakness in demand. Furthermore, it delivered a package of unconventional measures aiming to provide additional support to growth. These included a restart of the purchases of government bonds to the tune of GBP60bn, the purchase of corporate bonds (up to GBP10bn) and a new Term Funding Scheme.
The FOMC maintained its current monetary policy settings today, in line with market expectations. Neither the 0.25% to 0.50% Fed funds target range nor the Fed's current portfolio reinvestment policies were changed. The assessment of current economic conditions in the policy statement was more upbeat, reflecting stronger job gains in June and an expected acceleration in Q2 real GDP growth to be reported on Friday.
Like the rest of the EU, France will be affected by the United Kingdom's exit from the Union. The impact will, however be modest. In the short term there will be some market turbulence and a deterioration in the business climate. In the medium term, growth will be impacted by a slowdown in exports and foreign investment.
FOMC voters want to keep their options open for raising rates in June. They seek to "maintain the flexibility to make this decision based on how the incoming data and developments shaped their outlook for the labor market and inflation as well as their evolving assessments of the balance of risks around that outlook." Fed officials generally saw the Q1 growth slowdown as temporary and noted that labor market conditions continued to strengthen while inflation continued to run below the 2% objective.
The FOMC maintained its current monetary policy settings today, in line with market expectations. Neither the 0.25% to 0.50% Fed funds target range nor the Fed's current portfolio reinvestment policies were changed. The discussion in the March FOMC minutes and subsequent comments from Fed officials pointed to little chance of policy move in April.
There's a lengthy list of risks piling up upstream of our economic scenario. In addition to the geopolitical and political risks, consider also the following concerns: collapsing Chinese growth; a brutal, uncontrolled depreciation of its currency by Beijing; commodity prices plummeting again; a sharp slowdown in US growth; a sharp increase in corporate bankruptcies in the US oil sector; Eurozone deflation; and the inevitable miring of the emerging world in recession. These risks are especially frightening as gauging their possible dire consequences is a difficult, if not impossible, task… particularly as they are all connected and mutually sustaining.
To round off this already long list, and be certain of the imminence of catastrophic meltdown, the assumption that central banks have already used up all their ammunition is sometimes put forward. In the event of a marked growth slowdown, in the US in particular, it is felt that central banks would lack any means of action.
In real estate terms, 2015 was a good year. Housing sales rebounded in both the pre-owned and new-build sectors. Prices fell very little and signs of the market firming emerged at year-end. Total mortgage lending picked up, with new lending almost doubling relative to 2014. In fact, it seems to be cyclical, and linked to the level of lending rates and the new-build stimulus plan. Outlook for 2016 is more uncertain.
Our Q4 2015 growth forecast has been revised down to 0.2% q/q. In 2016-2017, the recovery in activity will be mainly stimulated by external factors and by specific economic policy measures. Growth should, however, be held back by structural factors and the slowdown in emerging countries. Consumption will continue as the main growth driver. Despite the relatively upbeat environment, the recovery should, therefore, remain sluggish.
Cereal prices continue to weaken, as a result of bumper crops two or three years running. Stocks are expected to remain high. The level of demand is essential in this context; paradoxically, the principal expectation of support for consumption is to be found in China. The current economic slowdown has had little impact on food consumption there, which remains healthy.
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