At the halfway point of the year, the fourth quarter saw lAmerican economy still in growth andEuropean economy not yet decreasing. Pessimists move the minus sign to the current quarter, but first we need to understand the reasons for resilience.
For the US, one answer may be to "never bet against the American economy", as he warned Warren Buffett, and there are reasons for this (not blind) faith. But for the European economy? What are the reasons for resilience (apart from the eponymous Plan, which is still under construction)?
The first reason lies, on both sides of the Atlantic, in the stability of employment and the fall in unemployment (on this side including youth unemployment), which are in turn supported by household and business spending. For families at both European and Italian level there is still the 'treasure' of savings accumulated during the pandemic when it could not be spent, and income was supported by subsidies and refreshments. For businesses, investments are made "forced" by the transversal transitions: green, energy and digital.
In economic history there have been examples of jobless recovery ('jobless recovery', as in the period after the 2001 recession in America) and there have been, postmortem, many learned explanations of this phenomenon, with no consensus emerging. But today, in the conjunctural bestiary, another phenomenon has arisen, which one could call jobfull recession: a weakening economy while employment continues to rise.
The reasons for resilience and the strange Jobfull Recession
Indeed, the fulcrum of the economy's stability lies precisely in the trend of the labor market, on both sides of the Atlantic. In particular, in theEurozone the dearth of information is such that one can only try to conjecture (as happened to the Kremlinologists who tried to understand by looking through the ground glass what was happening in the halls of power) from the unemployment rate and the vacant positions the state of supply and demand, and both indicators, plus household confidence, show that there is no shortage of job opportunities, if anything of workers. In the USA, on the other hand, the opposite condition occurs: there is such an abundance of figures that sometimes they don't give a univocal signal, and everyone starts conjecturing again.
Let's try to summarize the data USA: unemployment is close to historic lows and has fallen; the jobs created in the company surveys (from both official and private statistics) record an increase in hiring that continues to beat the estimates of the experts; 47,9% of consumers say jobs are plentiful (plentiful), an increasing percentage, while only 12,0% say that they are hard to find (hard to get), percentage down; the requests of unemployment benefits they are waning and at their lowest; vacancies are equal to 1,7 times the unemployed and nailed to high levels; the PMI in December indicates a further increase in personnel, albeit marginal; the level of voluntary resignations remains high, in the "I'm not afraid of running out of work" series. On the other hand, there are household statistics which say that employed persons have been stable since March and there is the possibility of a downward recalculation, at the annual review of employees declared by companies. It is not a trivial busillis, because it influences the decisions of the FED. Only by living will we be able to solve it.
As argued in the Lancet of last month, there are also positive structural factors which are raising the capacity for growth, above all in Italy (which started from a lower level) but also in other countries of that Old Continent which is trying to rejuvenate itself. And, although the PNRR is still in the making, its effects on expectations help. With regard to the Italian PNRR, the first priority of the Meloni government should be to follow Abraham Lincoln's wise advice: "Having eight hours to cut down a tree, it is better to spend six to sharpen the hatchet". And the ax to be sharpened lies in the procedures for the authorization of expenditure, in the reform of the bureaucracy and in the removal of snares and snares, even at the cost of using Alexander the Great's method to untie the famous knot…
In the face of the positive factors supporting the economic situation, the determination of the central banks stands out in crushing theinflation with monetary tightening, even at the cost of stoking recessionary tendencies. Here the positive factor – the resilience of the economy – can eat its tail, in the sense of encouraging the Banks to continue raising rates, because the economy is holding up…
The price-wage spiral and the dilemmas of central banks
And an economy that holds encourages wage demands and poses another dilemma for central banks: to choke the spiral in the cradle prices-wages we must hope that the latter do not keep up with the former. In short, the Fed and the ECB hope that workers will lose purchasing power, which would slow down the economy. The ECB is facing the dilemma first hand, as its staff in Frankfurt rejected the offer of a 4,07% salary increase (less than half the inflation rate in December) and there are rumors of a strike…
On the other hand, if the causes triggering inflation can be traced back to the increases in raw material prices, these increases lead to an inevitable impoverishment of all the countries that import them, i.e. of their citizens, and the workers are great pars of citizenships. Governments have intervened to alleviate the suffering, especially of the people who are most affected by those price increases, and who are also the poorest. All of this cannot be ignored in wage claims, i.e. the inevitable impoverishment and government aid.
However, we cannot expect active support for the economy from monetary policy, but only passive support, in the sense that real interest rates remain negative, even using the definition core of consumer prices. Even so, in a more correct calculation, today's rates should be compared, the fruits of which will ripen in the future, with tomorrow's inflation, and this must be understood in the operators' expectations, which are not infallible (I'll err humanum est…), and is lower than yesterday's inflation. For example, in the USA, consumer expectations are for a 5,0% increase in consumer prices in the next twelve months, against 6,5% in the past twelve. In the Euro area the same comparison is 5,0% against 9,2%. The financial markets, which are less extrapolative (i.e. they look ahead by being less influenced by the latest inflationary measure) and more speculative (in the sense that they observe the future through the telescope of all available information) are more optimistic: as of 13 January inflation of 2,0% in the USA and 3,4% in Germany, against the harmonized 9,6% in December.
And for fiscal policy? Here the news about the action to support the economy is better: still in September the projections of public deficits for 2023 they gave a tax stance (defined as the change in the structural primary balance net of support for the financial sector and contributions for the Next Generation EU) restrictive (+0,7 of GDP), while last month's estimates by the ECB see it expansionary, albeit narrow , in 2023 (-0,3 percentage points of GDP).
That said, let's review some of the usual tea leaves that are used to gauge the dynamics of supply and demand. Let's start with the orders, which express present demand and future production to satisfy it: their dynamic is always one of contraction, but a slight decrease in the rate of fall can be noted.
On the other hand, output continues to retreat in manufacturing, but at a constant pace for four months now at a global level (albeit with differences between macro-areas) and also in private services, the decline has stabilized at a non-worrisome pace, and if we add the public sector this decline becomes laughable.
Then there is the "active repentance" of the Chinese leaders, not only towards the war Covid (with a painful turn from "everyone at home" to "the most fragile perish"), but also in the international tug of war: with the actual war going on in Europe, and the USA flexing its military and financial muscles (read generous subsidies to strengthen its industrial power), in Beijing they have calculated that détente is in their interest. This can only mean that they will try to support their economy, also to prevent the mourning of the loss of the elderly members from families they must add up the decline in living conditions; otherwise shared prosperity would mean leveling down, rather than less unequal growth, as is the stated intention.
Now it is necessary to account for the titles and texts of the Lancet in the past year. Did we sin of excessive pessimism when we headlined the imminent economic collapse? With today's hindsight, certainly. In reality, mindful of a masterful teaching of an intelligent economist, such as Enzo Cipolletta, we must agree that the best forecasts are not those that come true but those that lead individuals and governments to behave in order to prevent them from coming true. And the alarm raised almost a year ago was justified even if looked at backwards. We can only rejoice that the worst has so far been avoided thanks to the countermeasures adopted, involving private savings and public support.
INFLATION
La price temperature it's getting cold. And faster than expected. Thanks to another temperature, which instead remained high, the meteorological one. Very mild autumn and winter have greatly reduced the demand for heating fuels. Furthermore, the reserve filling and source diversification policies prevented the concentration of demand in the "coldest" half of the year from pouring onto the market in search of the precious and volatile hydrocarbon. Finally, the EU overcame the last resistance of those who opposed the ceiling on the price of gas, strongly desired by Italian governments, past and present. The combined result of all these factors is that the price of gas has deflated, reaching the lows of August 2021.
Much the same can be said for crude oil (one third lower than last February), diesel and petrol. From this point of view, the controversy over the elimination by the Meloni government of the cut of excise duties, which had been introduced by the Draghi government to cushion past increases, more than useless it is harmful. In fact, pump prices are much lower today than when that cut was in effect, for the reasons stated above. And Premier Meloni (excuse us if we use the feminine, but we think it's a more and not a minus) was right to put hay in the farmhouse to deal with any emergencies that never end in life, such as exams.
Incidentally, the rose of mild autumn and winter temperatures had the big thorn in the little snow in the mountains, and for once the white blanket fell more on both sides of the Alps, to the desperation of the Austrian tour operators and the desolation of those gathered in Davos for the usual annual ritual. While the same site Bloomberg, in a recent article, invited to go on The Dolomites, where the landscape is candidly cloaked and where the panorama has no equal in the world (and also the facilities and hospitality, in defiance of Sankt Moritz which claims to be the top but which has bottom and top equipment and only has the prices ). It is another aid to the Italian growth.
The decline in the annual price variation will continue, thanks to the comparison effect with the period in which the increases were greater. That doesn't mean there will be a decrease in the cost of living and therefore it will be good pay attention to the impoverishment of many families and help them with food and health care. The inflationary slowdown observed so far is only a won battle, while the crusade for stability of prices is not over and must continue.
Lo final clash always lies in the main inflationary component, namely the cost of labour. The shortage of workers relative to demand favors an increase in real wages, but for this to be so, an erosion of profit margins, or a strong increase in productivity is inevitable (and many are automating production phases). Incidentally, December data in the US confirm this shift: consumer prices fell by 0,1%, and nominal wages rose by 0,3%, with a real increase of 0,4%, which will support consumption and demand and therefore inflation.
The effort of central bankers has not ended. And a good one coordination among economic operators (in Italy we have been masters and we can still be) it would help them a lot.
Speaking of components: the New York Fed made a brilliant analysis which "examines" the layers of inflation like an onion. Without boring readers with technicalities, the heart of the onion is still a couple of percentage points above the pre-pandemic dynamics.
This is also evident from the input and output price components in the PMI surveys. Both for one and for the other one is underway normalization, which is indeed underway, i.e. the increases persist above what we experienced before the pandemic. It is true that deflationary pressures prevailed at the time and therefore perhaps it is a good thing not to return to those values, but this means that interest rates will not return as low either.
RATES AND CURRENCIES
The annual circus meeting of the American Economic Association has just concluded in New Orleans. And the mood was not the best. Not so much because they feared gloomy scenarios (which some even designed), but because uncertainties dominated and helplessness. The heavyweights abandoned ancient theses: for example, the former US Treasury Secretary Larry Summers, who advocated a 'secular stagnation' that would have kept rates low, is now slipping away; former Chief Economist of the Fund, Kenneth Rogoff takes refuge in platitudes (“We live in a time of many shocks – this will be a watershed year for the global economy…”). The economic profession's failure to foresee a rate of inflation which has turned out to be higher, more lasting and more dangerous than expected, and which guides, as a polar star, the restrictive charge of the central banks.
A discrepancy that begins to emerge has major implications for monetary policy. In both America and Europe, employment rises, and the unemployment rate falls, as inflation is past its peak and beginning to decline. So far, a tight job market it was, for the central banks, a useful justification for the rate increase necessary to bring inflation under control. But, if the job market continues to be tight and inflation shows no sign of worsening – on the contrary… – that justification also fails. Certainly, it is still too early to change the pace or sign of monetary restrictions, but the rulers of the currency have one more reason to proceed with caution.
Naturally, there is no shortage of arguments that the said rulers could oppose: what matters is the clue core of prices, and this continues to score a growing dynamics. And there are signs that i wages, long dormant in Europe (and above all in Italy), could start to chasing inflation. One could continue with the counter-counter-arguments: for example, the rate core increases, but why not use the matrix of structural interdependencies to calculate how much the cost of energy affects the prices of goods core?
The markets, however, seem to believe in the change of pace in Fed and ECB policy, and are pushing rates down Bunds, T-Bonds and BTPs, which have lost 40-50 to 80-90 basis points compared to their highs at the end of December. The strongest reduction was for i btp, whose yield, as happens in times of increasing interest rates, had risen more than the others, and is now, symmetrically, fallen more than the others, driving back the spread at the levels of last spring, well below 200; have also helped the 'boatos' who see Germany as favorable to theissue of common bonds to face the high energy costs in Europe – a bit like those of the Next-Gen, but let's not call them Eurobonds, otherwise Germany will have second thoughts…. Then, the positive differential between two-year and ten-year bonds narrowed (less inversion of the yield curve), both in the USA and in Germany. More generally, borrowers around the world have pushed hard in recent weeks on thebond issue, trusting that they would be welcome with the prospect of falling rates.
On the currency markets, the dollar continued to lose ground, and not just against the euro: since the beginning of last November the greenback has lost about 10% against the euro and 8% against the currencies of advanced economies. It is not easy to settle the causes: perhaps the growth differential – previously clearly in favor of America – has narrowed, and perhaps the markets are expecting it Fed come down to milder advice before the ECB. Or, more simply (the suspicion had already been hinted at in the last Lancette), the dollar went down because before it had gone up (too much)…
Lo yuan it has followed a similar trajectory, and has also strengthened against the euro in recent days. Here the causes are less difficult to resolve: clumsiness exiting the restrictions from 'Covid-zero' it will be, in fact, awkward, but in any case helps growth, together with plans to support a real estate sector in a severe crisis.
I stock markets, like those in bonds, believe in an imminent end to rate hikes, or at least a slower rise. They are probably right, as far as rates are concerned, but perhaps they don't take into account the other determinant of quotations: the to evaluate. The labor cost increases and a slowing economy they can bring bad news for stocks. In particular, the real estate sector is in sharp decline: the main rate for house purchases by US families – the thirty-year mortgage – is at 6,4%, much higher than expected inflation: permits and construction sites for residential construction are falling sharply. Not to mention what can happen to the Kremlin...
Il yellow metal it has gone up a lot. Why? We confess ignorance. Refuge from geopolitical tensions? But these are no more tense than before. Refuge from inflation? But this is going downhill. Short of arguments, it is hypothesized that – also on the basis of the fact that the central banks are buying, probably of Russia and China – gold lends itself better to circumventing sanctions. Bah, as we said before with regard to another busillis, "only by living will we be able to solve it".
