Weekly Analysis
Typography

United States. The quiet after the storm (the hurricanes, in fact) will be accompanied by high data volatility between 3Q and 4Q.......

 

Typically, hurricanes (Katrina in 2005, Sandy in 2012) affect growth in the same quarter as the event (decline in demand and employment), and drive it in the following quarter, at a faster pace than before the event, without altering the trends. The recent hurricanes could slow GDP growth in 3Q by around one tenth, and strengthen it by a couple of tenths in 4Q. The effects on monthly data are already on their way. With respect to monthly activity data, for a couple of months job claims (already on a sharp uptrend) should increase, as opposed to a drop in employment levels, auto sales (and, to a lesser extent, consumption), and consumer confidence.

The negative effect on business surveys and industrial output should be visible on September data, and disappear already the following month, thanks to the reconstruction process. The main effects on inflation data will be tied to the energy component (Texas) and food prices (Florida), with a temporary rise also in business sectors involved in the reconstruction process.

The total or partial shutdown of many oil refineries has resulted in an increase in gasoline prices (+14% compared to the pre-Harvey level), which will translate into higher inflation in the autumn. According to the EIA, the rise in the price of gasoline will peak in September (effect on CPI of around 0.5pp), and gradually ease back in the following months towards spring levels.

The result will be a lack of trustworthiness of the data released in the autumn, with the likely return to the previous trends starting at the beginning of 2018. 

Euro area. This week, the President of the EU Commission, Juncker, has laid out an ambitious plan for the future of the European Union. The real debate will begin after German elections.

This week, in the annual State of the Union speech before the European Parliament, the President of the EU Commission, Jean-Claude Juncker, laid out the priorities for next year and in the run-up to the European Parliament elections in 2019. Juncker touched on some of the themes raised by Coeuré (ECB Board member) in a speech delivered on 12 September.

The solid euro area growth phase creates an opportunity to relaunch the political dialogue on the reforms needed to complete the architecture of the monetary union, after years in which ECB policies have been the main source of support for the euro area economy. However, the ECB has already started normalising unconventional policies and chiefly QE purchases, albeit very slowly.  

Juncker presented some ambitious priorities, such as: the transformation of the ESM into a European Monetary Fund (EMF), the creation of a European Finance minister, who would ideally act also as European Commissioner for Economic and Monetary Affairs, and the establishment of a euro area Budget. Macron’s victory at the French presidential elections has made possible a reconsideration of the Franco-German axis and has created the conditions for talks to resume fruitfully on the reform process.

The role Germany will play following the elections will be crucial. Angela Merkel will almost certainly be re-elected for a fourth mandate, although the coalition partner she will inevitably have to govern with will also hold weight in terms of the prospect of reforming the Union. Merkel recently expressed a favourable view on establishing a budget of limited size for the area euro, in response to Macron’s proposals; the CDU has always supported the idea of transforming the ESM into a European Monetary Fund (EMF), which could manage future crises more independently than the EU Commission and national governments.

Should the current government coalition with the SPD be confirmed, the prospects for the reform process would be brighter, given the Social Democrats’ greater openness on European issues. By contrast, if Merkel is obliged to form a government alliance with the FDP, as was the case in 2009-2013, the reform process could prove more difficult, as the FPD liberals openly oppose outright monetary transactions, are in favour of market-based solutions to debt crises, and strongly support the strict application of Stability Pact rules, with a strengthening of the no-bailout clause. While relaunching the reform process is urgent business, there is no guarantee that significant progress will be made during the next legislature.


Appendix
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