Based in Paris, BNP Paribas' Economic Research Department is composed of economists and statisticians:
« The Economic Research department’s mission is to cater to the economic research needs of the clients, business lines and functions of BNP Paribas. Our team of economists and statisticians covers a large number of advanced, developing and emerging countries, the real economy, financial markets and banking. As we foster the sharing of our research output with anyone who is interested in the economic situation or who needs insight into specific economic issues, this website presents our analysis, videos and podcasts. »
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As we approach 31 October 2019, the latest deadline for the British exit from the European Union (Brexit), who can say where the UK is heading? Probably not the Prime Minister itself, Boris Johnson, who lost his majority in the House of Commons in an attempt to suspend discussions and fuelled scepticism among his European partners by presenting a take it or leave it ‘compromise’ on the Irish backstop that is hardly applicable nor acceptable. This would leave the Brexit end-point with no deal, although this has been prohibited by a law, or the more likely, but by no means guaranteed, outcome of a new extension accompanied by an early general election.
Since the mid-1990s the Italian economy has seen a significant economic uncoupling, which has worsened since the 2008 financial crisis. Its difficulties include a level of productivity that is one of the lowest in the advanced economies, a demographic decline and a relatively inefficient labour market, which still excludes too many young people. Structural reforms were introduced under the government of Mario Monti, from 2011 on, bringing a recovery in fiscal and trade accounts, but it remains to be seen what the current government will now do.
Although household consumption remained rather buoyant at springtime, foreign trade as well as investment may have weakened. In June, the business survey results were lacklustre, while the Federal Reserve opened the door to cutting interest rates. Already back on the campaign trail, President Trump is unlikely to soften his hard line on tariffs, although he will surely remain as unpredictable as ever. The economy is likely going to need some support.
Brexit has been behind thirty-seven resignations from the government responsible for managing the process, the latest being that of Prime Minister Theresa May herself. Having failed three times to get the Withdrawal Agreement through Parliament, she had little choice but to ask for an extension of the Article 50 period and then in the end to resign. The two candidates to take her place are the current Foreign Secretary, Jeremy Hunt, and his predecessor, Boris Johnson. Whilst Mr Johnson claims he can negotiate a changed deal and trigger Brexit from 31 October 2019 (the latest deadline), Mr Hunt plans to seek more time in order to renegotiate to allow for an orderly exit.
In the United States, the tide hasn’t turned yet for consumers: on the positive side, our barometer points to low unemployment, strong consumer confidence and dynamic household revenues and spending. Inflation is also mild, which boosts purchasing power. Even so, the horizon is not all rosy. Positioned in the forefront of the economic cycle, industrial leaders report a decline in output, which was one of the barometer’s weakest scores in April, and their expectations did not pick up in May.
Interest rates on US federal government debt have declined significantly in recent months. With the yield on 10-year Treasuries at 2.1%, the Federal government’s cost of borrowing has fallen to the lowest level since September 2017. President Donald Trump is bound to be pleased. The supremacy of the dollar offers him the privilege of being able to widen the deficit almost endlessly, at a time when the appetite for US Treasuries seems to be inexhaustible. Yet the stronger demand for Treasuries is also a warning signal: it indicates that investors are seeking safe havens as they form more cautious expectations. In the United States, the decline in yields is also a faithful indicator of a deterioration in the business climate.
What do the results of the European elections tell us? Does Prime Minister May’s resignation change things?Can the Withdrawal Agreement still be saved? Is there still a risk of a no-deal Brexit? Are we heading towards early elections? How is the UK economy holding up?
Although losing steam, the economic activity in the US is seen keeping on a rather dynamic path in 2019. The International Monetary Fund still forecasts a 2.3% increase in GDP this year, while delivering an increasingly cautious message in the meantime. The IMF recently pointed out several risk factors, including the record high corporate debt ratio, the opacity and less stringent standards on the leveraged loan market, and stretched equity market valuations. Moreover, the inversion of the yield curve is virtually complete, which in the past has always been an early-warning sign of recession.
By opting to leave the European Union (EU) without any exit plan, the United Kingdom has come face to face with an impossible choice. Week after week, the Brexit impasse has revealed the British Parliament’s incapacity to make decision, starting with the ratification of the divorce terms, the fruit of 2-years of negotiations by Prime Minister Theresa May. In the end, the Brexit was simply postponed. First set for 29 March, then 12 April, the deadline for exiting the EU has now been extended to 31 October (a Halloween treat?). This date could be moved forward if the UK finally manages to ratify the withdrawal agreement, which it has rejected time and again. But the most probable scenario is that the UK will extend its participation to the EU, at least for a while…
In the eurozone, money market rates have been holding in negative territory for more than four years. The highest-rated government and corporate bonds are still yielding less than 1%. The distribution of interest rates around the zero lower bound was initially seen as an exceptional crisis adjustment mechanism, but the situation persists. Some expect this exceptional period to finally come to a close once the European Central Bank halts its net securities purchases and possibly begins to raise key rates after summer 2019. For others, the situation has definitively changed: a bit like Japan, the diminution of eurozone interest rates marks the erosion of growth potential and the quasi-elimination of inflation
In the United States, positive cyclical surprises have become rare: employment figures and the ISM purchasing managers’ index were the only statistics that surpassed expectations in January. Yet these are solid indicators. Moreover, although industrial output and retail sales were disappointing, they were probably caused by poor weather conditions (extreme cold wave) or temporary factors (government shutdown). For the moment, the US economy still seems to be poised for a smooth landing.
Geared towards the wealthiest households, President Trump’s tax cuts have not exactly matched the America First agenda. A famous foreign car brand, which can be identified by the small statue on the front hood, has just announced record high US sales for the year 2018. And it is not the only winner. By fuelling demand at a time when the economy was already operating at its potential, American policy resulted in a widespread increase in imports and a huge trade deficit. It is now at a record high at almost USD 900 billion. Higher trade barriers did not really help, as the deficit widened primarily with China. *Read also Chart of the Week published on 10 October 2018
The assumption that the US economy is heading for a landing is gaining ground, not just because of the shutdown. The disruption created by the trade war with China, the appreciation of risk on bond and equity markets, the peaking of the energy sector and the deterioration of real estate indices all suggest less buoyant growth. This view is shared by the US Federal Reserve, which has adopted a more cautious tone and suspended the increase in policy rates pending future macroeconomic data.