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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We monitor uncertainty by means of different metrics. Starting top left and moving clockwise, the economic policy uncertainty index, which is based on media coverage, is at a historical high, on the back of US-China trade tensions and fears about a disorderly Brexit. The recent trade deal between the US and China, although of a very limited scope, and the agreement between the UK government and the European Union on Brexit, have fuelled hope that uncertainty will abate in the near term. This obviously remains to be seen...
The Japanese government bond yield curve has been flattening in recent months, with very long maturities coming dangerously close to 0%. This is creating concerns amongst institutional investors with long-dated liabilities (insurance companies, pension funds) Bank of Japan Governor Kuroda has argued that an excessive decline in super-long-term interest rates could negatively impact economic activity This has raised expectations that the central bank could shift to a policy of controlling the slope as well as the level of the yield curve. This could influence bond yields abroad. In the eurozone it would intensify the debate about the impact of ECB policy on pension funds and insurers.
The slowdown of global growth has gathered pace, forcing the Federal Reserve to cut the federal funds rate on two occasions, whereas the ECB has announced a comprehensive easing package. Nevertheless, the slowdown is expected to continue. Uncertainty is pervasive. Companies question the true state of demand faced with slower growth, trade disputes, Brexit worries, geopolitical risk. Corporate investment suffers and may impact households via slower employment growth. The room to boost growth via monetary policy and, in many countries, fiscal policy has become limited, and this is another factor which could weigh on confidence. Surveys of US corporate executives point towards high concern about recession risk and the US yield curve inversion adds to the unease
The manufacturing purchasing managers’ index of the Institute for Supply Management (ISM) has continued its decline in September, reaching 47.8%. The non-manufacturing ISM has registered a big drop of 3.8 percentage points and is now at 52.6% — a very low print for a non-recessionary period. Against this background, bond yields have declined significantly reflecting increasing worries about recession risk, rising expectations about additional Fed easing and a greater flight to safe havens. The labour market data for September however brought some relief. Nevertheless, we expect the Fed to continue to cut rates.
Although August industrial production and retail sales beat expectations, key data with respect to September have sent conflicting signals. Both the manufacturing and non-manufacturing ISM came in below expectations, creating a lot of nervousness in the run-up to the release of the all-important labour market data. They brought relief with 136.000 jobs having been added in September (versus a Bloomberg consensus of 145.000) and, in particular, an unemployment rate of 3.5%, which is well below the consensus of 3.7%...
Germany is probably in a technical recession and recent data do not point to any improvement in the near term, quite to the contrary. Given the country’s considerable budget surplus, German business leaders are calling for fiscal stimulus. This echoes Mario Draghi’s plea in favour of budgetary expansion in countries with fiscal space. Simulations show that spillover effects to other eurozone countries would be small. Moreover, the implementation of a fiscal package requires long preparation and may be hampered by labour shortages.
The Federal Reserve and the ECB are in very different positions: the former has more room to ease policy and it is also closer to its policy targets. The ECB has limited remaining policy leeway but is confronted with an inflation shortfall versus its aim and a risk that this gap would increase, rather than narrow. These differences have led to diverging approaches in the conduct of and communication about monetary policy. The Fed is data-dependent and, except for the projections of the FOMC members, offers no guidance. The ECB is agnostic about the data and builds its communication around state-dependent forward guidance: policy tightening will be solely conditioned by meeting its target
Market expectations were elevated but the Governing Council did not disappoint. The comprehensive nature of the package, with the introduction of state-dependent forward guidance, take away the need to envisage additional measures in the foreseeable future. ECB watching has been narrowed to monitoring the gap between inflation and the ECB target. Given certain negative side effects of the current monetary mix, which are acknowledged by the Governing Council, fiscal policy, where leeway is available, is now requested to step up to the plate, so as to foster growth and speed up convergence of inflation to target. The policy baton has been passed.
Business surveys in the US paint a diverging picture: manufacturing is worsening significantly but services have picked up nicely. Taking a broader perspective, evidence is building of a slowing economy. Less dynamic growth can be observed in engines of growth of the world economy: China and India, although reasons differ. In Europe, Germany is probably already in a technical recession whereas France is resilient. Central banks are back in easing mode but the effectiveness will be hampered by elevated uncertainty, despite the announcement of a new round of trade negotiations between the US and China.
Asset prices can play a useful role when assessing the economic outlook. The big drop in treasury yields during August has raised concern although a nowcast points to satisfactory third quarter growth in the US. This would mean that increased uncertainty about the trade dispute has caused a flight to safe havens and a decline in long term interest rates. Swings in the communication about the trade dispute cause swings in investor uncertainty and hence in risk premiums. This reduces the signal quality of asset prices, which may end up weighing on the real economy.
The Governing Council has tasked Eurosystem committees to examine its monetary policy options. Given the insistence on its determination to act, Thursday’s meeting outcome was basically a pre-announcement of easing in September. Being aware of the importance of maintaining the ECB’s inflation targeting credibility, Mario Draghi was very explicit in expressing his dissatisfaction with current inflation and its outlook, adding that a highly accomodative monetary policy is here to stay for a long period of time.
According to the recently released Beige Book of the Federal Reserve, the United States should continue to see modest growth. Most indicators are above their long-term average, the manufacturing ISM and industrial production being exceptions.
Despite an increase in June, core inflation in the eurozone remains stubbornly low. The dispersion is significant between countries and between the expenditure components of the price index. Inflation is low for clothing and footwear, furnishings and household equipment, transport and communications. It is higher for housing-related items, restaurants and hotels, miscellaneous goods and services and recreation and culture Non-energy industrial goods price inflation is very low. Should this continue, it would imply that the acceleration of inflation which is the ECB is pursuing by renewed policy easing, has to come from services. However, research shows that it takes more time for services prices to respond to monetary policy and economic activity. Monetary accomodation is here to stay
Growth concerns for both advanced countries and emerging countries have picked up again on the back of a collection of new economic data but also — and perhaps more importantly — due to continued high uncertainty. The latter stems from escalating tensions between the US and China over trade. The effects of this confrontation already show up in the Chinese data while in the US, mounting anecdotal evidence also point to its detrimental impact on business and the agricultural sector. The Federal Reserve has turned a corner and indicated that rate cuts are coming, much to the joy of the equity market. The ECB has also changed its message: with risks tilted to the downside and inflation going nowhere, it considers more easing is necessary.
Fed Chairman Powell, in his address to Congress this week, has confirmed that easing is coming. In June, ECB President Draghi provided similar hints. This comes on the back of growing concerns regarding global growth and ultimately facing too low a level of inflation. Risks may be mounting, but, on the other hand, the unemployment rate is close to the natural rate. There are reasons to assume that monetary easing under full employment would be less effective than when the economy is marred in recession. Monetary easing could also raise concerns about financial stability, which, if unaddressed, could weigh on the ability of monetary policy to successfully boost inflation.
A sigh of relief followed the publication of first quarter GDP data. However since, growth concerns have picked up again on the back of a collection of new economic data but also — and perhaps more importantly — due to continued high uncertainty. The latter stems from concerns over the extent of the slowdown and its consequences in terms of economic risks. It also emanates from escalating tensions between the US and China over trade. The effects of this confrontation already show up in the Chinese data while in the US, mounting anecdotal evidence also point to its detrimental impact on business and the agricultural sector. The Federal Reserve has turned a corner and indicated that rate cuts are coming, much to the joy of the equity market
A high level of uncertainty can act as a drag on growth. Whether monetary easing will succeed in boosting growth will depend on the nature of uncertainty. Endogenous uncertainty follows from the normal development of the business cycle and rate cuts should succeed in reducing this uncertainty by boosting confidence of economic agents. Exogenous uncertainty is not driven by the business cycle but is triggered by other factors, such as, in the current environment, ongoing trade disputes. In this case, monetary policy effectiveness suffers and, despite rate cuts, the growth slowdown should continue until its root cause (exogenous uncertainty) is addressed.
High levels of uncertainty can have a profound impact on economic activity and financial markets. Our Pulse presents different metrics.
The slowdown since the start of last year is of a different nature in France, where it has manifested itself in manufacturing and services, compared to Germany, where it is very much concentrated in the manufacturing sector. Recent data show a somewhat improving picture in France whereas in Germany signs of stabilisation remain tentative. Under the hypothesis that concerns about trade relations (US-China, US-Europe) and Brexit will not disappear anytime soon, it seems difficult to expect a significant improvement in the near term. France could however surprise positively on the back of the measures to support the purchasing power of households.
ECB President Mario Draghi, speaking at Sintra, has raised expectations of renewed policy easing.The message from the FOMC meeting is that rate cuts are coming. This policy synchronisation reflects shared issues (inflation too low versus target) and shared concerns, the major being rising uncertainty. Should this continue, the effectiveness of monetary accomodation will suffer.
According to Mario Draghi, a key question is how long the rest of the economy can remain insulated from the weakness in the manufacturing sector. Historically, the purchasing manager indices for manufacturing and services have been highly correlated, which can be partly attributed to the important role of services in the value chain of the manufacturing sector. The future resilience of the services sector in the eurozone will very much depend on what happens in Germany where the gap between the PMIs of the two sectors is abnormally high.
The ECB has eased policy slightly, by extending its forward guidance on policy rates. On the other hand, the conditions on TLTRO III are slightly less generous than those on the previous operation. Importantly, a discussion has started within the Governing Council on how to react should the environment worsen. Understandably, given the eurozone fundamentals, the ECB is not yet in a hurry to react to the prolonged uncertainties. This is a matter of keeping its powder dry
In a recent survey of 469 CFOs of US companies, 84% expect that the US will have entered recession by the first quarter of 2021. This raises the concern of self-realising bearish expectations. A positive correlation between business confidence and company decisions could reflect (anticipations of) strong fundamentals. It could also be due to animal spirits. The role of the latter is confirmed by empirical research by cesifo using data for German companies. In the aggregate, optimistic animal spirits have a bigger impact than pessimistic animal spirits.
Survey data released this week provide mixed signals with an improvement of consumer confidence, a weakening of the ifo business climate index in Germany and a stabilisation of the INSEE indicator in France. The IHS Markit PMIs show a stabilisation in recent months in manufacturing, at a subdued to low level, and in services, at a more satisfactory level. Several drivers of domestic demand remain supportive. Nevertheless, unease remains, mainly for reasons on which the eurozone has no control and where the risk of further tariff increases is top of the list.
Against a background of trade tensions between the US and China, economic policy uncertainty remains very high. Uncertainty of German companies, measured by the dispersion in their assessment of the business environment, is no longer increasing, yet remains at a high level. Uncertainty of US companies had dropped at the start of the year, but has now rebounded a bit. Geopolitical risk, measured using news coverage, has been on a rising trend since early 2013, although it has eased recently. Uncertainty based on the dispersion of the stock market performance of individual companies has declined since the start of the year.