Pump up the volume

We are almost there.

After six years of intense depression, it seems that a weaker euro, lower oil prices and cheap financing costs are doing the trick - the largest economy in the world, Europe, is finally on the mend.

It did not come at zero cost for companies and households, but as noted in our Economic Outlook, titled “Focus on the signal and ignore the noise” we can let out a small sigh of relief. [more]

In the meantime, the world has changed dramatically.

First, Asia got reorganized as demonstrated by China’s drive for a different DNA, Japan’s fight against deflation, and the organization of smaller South east Asian economies in a smart building block in global value chains.

Secondly, the U.S. has managed to show its resilience to strong headwinds and last, emerging markets have shown they do matter. Yet, their economic growth hit a wall, as our Country Risk map clearly shows: Russia and Brazil are good examples of how politics and policies could harm reputation and endanger private sector growth.

Ultimately the world seems to be growing more used to multiple hotspots, but this raises the importance of nurturing other options. There are two remaining questions about the alleged alignment of stars that Euler Hermes’ Economic Research team revealed in this report:

(i)                   How long will it take for the positive macroeconomic developments to trickle down to companies’ balance sheets?

(ii)                 Are we ready for a priceless recovery? We do see the reduced energy bills pushing up profit margins of many small and medium enterprises, and households are often spending the extra disposable income.

But this is not happening universally and it has not yet translated into additional investment decisions. Old habits die hard. However if you add to this the very low cost of credit in advanced economies, it could take only another couple of quarters for investment to materialize.

As for the absence of a price effect, this is a problem. Volumes should pick up, but nominal values may have to wait for another round of structural reforms, reassuring policies and a less messy emerging world. 

The amusing part of all of this is that a priceless recovery is happening with record liquidity levels, and the ominous formation of bubbles in many countries and sectors, including housing and infrastructure.

Will we ever learn? Companies did –or died.

Ludovic Subran

Chief Economist

Euler Hermes

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