Friday, January 11, 2019

Are we ready for the coming recession?


Just over a year ago, the world began 2018 in an optimistic tone: synchronized acceleration of growth on all continents, thanks to a booming America, ideal alignment of planets with interest rates at the lowest ever , oil prices stabilized at a low level, euphoric financial markets.

Admittedly, clouds crossed the horizon: the risk of a trade war between the United States and China, a surge of indebtedness, fragility in emerging countries, a migratory crisis, and already, worries about the rise of populism. But the business community was convinced everywhere that ten years after the 2008 financial crisis, which nearly took away everything, the global economy was back on track.

The "startup nation" is in the lead

Just elected, a young French president under 40, clamait "France is back" in front of the participants of the World Economic Forum in Davos, received with great pomp at Versailles the world giants of industry and digital to encourage them to invest, and extolled its reforms in favor of "Startup nation" : suppression of the ISF, flat-tax on capital, a planned drop in the corporate tax, the reform of the labor market ... We were going to see what we were going to see with, finally, a France acquired with liberal ideas for a conquering revival!

And in fact, this strategy began to work: recovery of job creation, investment projects. Las, eight weeks of social protest by the "Yellow Vests", violent clashes with the police in the heart of the metropolis, have turned the dream into a nightmare, put the economy of the country down and makes foreign investors disillusion on the talents reformer Emmanuel Macron.

Slowdown on global growth

2019 begins on a noticeably darker note: the global economy began to turn around from the spring of 2018 with the beginning of tensions in the financial markets; the industrial situation has frankly deteriorated this autumn; the hardening of the strategy "America First" Donald Trump turned to the trade war with China whose growth has slowed sharply, passing for the first time under 7%, despite the announced truce.

In Europe, the German exporting machine, whose industry, especially automotive, depends on the US and Chinese markets, has stopped and plunged in the last quarter. With the relative defeat of Angela Merkel in the German legislative elections in October, and the victory of a populist coalition combining the two extremes in Italy, the whole French recovery strategy of Europe fell into the water. And France itself, which thought itself immune, since the autumn crosses an unexpected revolt, Gallic version of the social and democratic crisis that strikes all Western countries.

The risk of an endless social crisis in France, unless ...

It has already been written a lot, this crisis of "Yellow Vests" comes from far and will not be solved quickly. Confused and already disorganized, the "Great Debate" promised by Emmanuel Macron may turn to "great defower" and it is feared that it serves only to open a little larger Pandora's box divisions between French who do not are more in agreement on nothing. The ranting between the Elysee and Bercy on the abolition or not of the housing tax of the 20% of the wealthiest French give the image of a drunken boat with an executive at bay.

How to conduct such a debate excluding on one side any questioning of the removal of the ISF for the richest, while suspending the other the fate of the housing tax for the upper middle classes? Emmanuel Macron, who has already lost the support of the lower classes, would he like to lose in addition that of his constituents, the executives of big cities, called to be the "cuckolds" of history?

The risk is great of an endless crisis: it can find a political solution only in a change of course, what Macron has excluded - on the contrary, it wants to accelerate on unemployment insurance, pensions or weight of the state - or in a return to the electorate, the only way to regain democratic legitimacy. The dissolution of the National Assembly remains an option, which leaves open the possible victory of a populist majority and thus a radical change of policy. In short, all this context is unfavorable for business, with companies and investors paralyzed by the uncertainty that this climate maintains on the level of wages or taxes.

Beware of the debt!

More dangerous still, this crisis occurs at a time when France no longer has any room for maneuver to deal with it. We have seen with the 10 billion euros of the economic and social emergency plan of December, funded by the loan, so by the children of "Yellow Vests". If there is a recession in 2019, budgets will be in the front line to absorb the shock.

However, the countries of northern Europe, Germany in the lead, will be reluctant to accept a new drift from France that Die Welt sees the "third division", being the only country whose deficit exceeds 3% of the GDP in 2019. And, even if one escapes the recession announced, France is just as trapped, as Italy of elsewhere, because its budget will then be constrained by the coming up of interest rates while its debt will reach 100% of GDP.

In summary, these "Yellow Vests" could well occupy the public space for the next ten years, so much the discomfort is deep between "the people" and "the elites", and both the answers to the expectations of improvement of the power of purchase will be difficult to meet quickly.





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