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.
+331 58 16 03 63 helene.baudchon@bnpparibas.com
In this special edition of Economic Research devoted to interest rate cuts, we introduce you to Isabelle Mateos y Lago, who succeeds William De Vijlder as Chief Economist of the BNP Paribas Group and Director of the Economic Research department. The Fed and the ECB are cutting rates. How much of a good sign is this? This is the subject we then tackle with Hélène Baudchon, before discussing the effects of the rate cuts on European banks with Laurent Quignon. Finally, we end with Christine Peltier analysing the effects of the Chinese slowdown on emerging countries.
The ECB made its first rate cut at the beginning of the summer, followed by the Fed, which lowered rates by 50 basis points. After three cuts of 25 basis points by the ECB,Hélène Baudchon explores. Is this a good sign or a bad one?
The issue of public finances and their rebalancing has come to the fore, particularly in France, but not only. This problem concerns many other countries, most notably the United States.
Reflecting Jerome Powell's statement that it is time to adjust (i.e., loosen) monetary policy and subsequent action, it is also time to adjust fiscal policy in Europe and the United States, in the direction of tightening in both cases. This is a good time, given the context of monetary easing, falling inflation and positive economic growth. Even more than monetary easing, this fiscal consolidation must be gradual so as not to weigh too much on growth. Like the central banks that have been determined in their response to the inflationary shock, governments will have to show the same determination and perseverance in the coming fiscal consolidation efforts, given their necessity and significance.
In September, the U.S. Federal Reserve at last followed suit with the ECB and the Bank of England and cut its policy rates for the first time since March 2020. But the Fed marked its difference, favoring a significant 50-basis-point cut instead of a more gradual 25. At least on that point, the suspense is over. But the rest of the story has yet to be written.
The past week (16-22 September) was packed with monetary policy meetings and inflation reports. While the US Federal Reserve’s first key rate cut of 50 basis points was larger than we had expected, the status quo by the BoE and BoJ was in line with our expectations. With inflation running below 3%, real interest rates on both sides of the Atlantic remain broadly in restrictive territory. Expected moderation in inflation in services should prompt central banks in Europe and the US to continue monetary easing in the coming quarters. Wage growth in the private sector picked up slightly in the US, while slowing in Europe. The downward trend is expected to continue, with a less dynamic labour market
While the date of the Fed's first rate cut is now foreseeable (it will be at the FOMC on 17-18 September), everything else remains uncertain: the size of the cut, as well as the overall extent of the easing cycle and the timing of the cuts. Developments on the US labour market are key in this calibration. In terms of inflation, significant progress has been made regarding the return to price stability on both sides of the Atlantic, but the battle is far from won. This calls for caution in the monetary easing that is beginning
Our central scenario of a Eurozone take-off and a US soft landing, confirmed by the latest available indicators, is characterised by an expected convergence in growth rates. This base case could, however, be impacted by political uncertainties on both sides of the Atlantic (uncertain outcomes of the early parliamentary elections in France and the US presidential election). Furthermore, while the ECB began its easing cycle in June, as expected, providing timely support for growth, the Fed is still holding back. This extension of the status quo, even if it seems justified for the time being, constitutes another downside risk. However, growth is benefiting from other supportive and resilient factors, chief among them real wage gains
Although we now know the results of the European elections, the implications of these results – in particular the outcome of the snap parliamentary elections in France – remain uncertain. Our central scenario of a Eurozone take-off and a US soft landing, characterised by a convergence of growth rates, could be weakened by political uncertainties on both sides of the Atlantic. However, growth is benefiting from tailwinds and factors of resilience, with real wage gains at the forefront. For the time being, the cyclical situation remains positive for the Eurozone: our nowcast estimates Q2 growth at +0.3% q/q. However, greater uncertainty surrounds the continuation of this recovery.
In the four zones covered (United States, Eurozone, United Kingdom, Japan), wage growth continues to outstrip inflation, supporting household purchasing power gains, but contributing, apart from Japan, to keeping inflation in services at high levels. Price pressure indices and producer prices are recovering moderately.
The ECB’s meeting on 6 June, as well as the statement and press conference that will follow, are very much awaited, not because the outcome is uncertain, but because it should mark the start of the ECB’s rate-cutting cycle. Some points to note.
Some common inflation trajectories emerge between the different economic blocs: disinflation of food and manufactured goods continues, while energy deflation has largely abated, except in the United Kingdom. Apart from Japan, price pressure indicators (supply side) have rebounded in recent months (page 19) while wage growth is currently higher than inflation in all the regions (page 27).In the United States, CPI inflation fell slightly, from 3.5% in year-on-year terms in March to 3.4% in April, while the core rate fell from 3.8% to 3.6%. Deflation in used vehicles (from -2.2% in March to -6.9%) contributed mainly to this decline. On the other hand, services inflation remained stable at 5.3%
In the first quarter, real GDP growth in the United States and the Eurozone was almost on a par, at a quarterly rate of 0.4% for the United States and 0.3% for the Eurozone, according to initial estimates. However, on a year-on-year basis, the situation remains very much to the United States’ advantage, with growth of 3% when Eurozone growth is only 0.4%.
2024 should be the year of the start of the easing cycle by the Federal Reserve, the ECB, and the Bank of England, primarily to accompany the easing of inflation. However, the timing of the first cut remains uncertain, as does the number of expected cuts. Conditions for a first rate cut in June seem to be in place for the ECB, which, according to our forecasts, would thus act before the Fed, whose first rate cut is expected in July (instead of June previously). The possibility is rising that the Fed will not cut rates at all this year because of the resilience of growth and inflation. Such a prolonged Fed monetary status quo could have more negative than positive consequences.
US inflation March figure, again higher than expected, put an end to our scenario of a simultaneous first rate cut by the Fed, the ECB, and the BoE in June. We now expect only two rate cuts by the Fed this year, the first in July and the second one in December. The possibility is even rising that the Fed will not cut rates at all this year. On the ECB’s side, we maintain our expectation that the first cut will occur in June, but we have ruled out our back-to-back cuts forecast (i.e. June, July and September), favouring a more gradual easing of one cut per quarter (in June, September and December). The ECB would end up cutting rates before the Fed.
Despite the rebound in the United States, inflation continues overall to slow in the G7 countries and in the euro area as a whole. In Japan, keeping consumer prices above 2% will remain complicated in the short term, due to the loss of momentum observed this winter: inflation rebounded in February due to base effects, but the 3m/3M annualised rate fell back to 1.3%. The decline in the 3m/3m annualised rate is more marked in services, down to only 0.4%. The wage increase granted following the annual wage negotiations (Shunto): 5.3% in total, including 3.7% in base salary, will nevertheless support the BoJ in its (very gradual) attempt to normalise monetary policy
The US 2-10s yield curve has been inverted since mid-2022, with no clear signs of an impending recession in the US economy. Thanks to the current risk-on mood, this looks like a “false positive”, as it did in the mid-1990s.
Consumer price disinflation stalled at the beginning of the year in Europe and the United States. With the tailwinds of energy price deflation fading, core inflation, which is still high, now accounts for almost all of the price increases in the United States. This is less true in the euro area and the United Kingdom, where food inflation still contributed almost a third to headline inflation in January. The decline in inflation in 2023 has led, in all areas, to a downward shift in household inflation expectations in the short-term (1 year) towards long-term expectations (5 years). Wage growth continues to outpace inflation and fuel a recovery in purchasing power, which appears to be stronger in the United States and the euro area than in the United Kingdom.
Headline inflation has stabilised in recent months in the United States, the euro area and the United Kingdom, while it has declined in Japan. Core inflation continues to fall and its decrease is broad-based. Aggregate indicators of price pressures, calculated using PMI surveys, deteriorated again amid longer delivery times linked to the ongoing disruptions to global maritime trade. The PMI input price indices are also up in the US and the UK (page 18).
2023 closed on a note of hope, with expectations of rate cuts and signs of stabilising, perhaps even improving confidence surveys. This hope has not dissipated in the early weeks of 2024. In the absence of a new shock, inflation seems to be on course for a return to the 2% target. This opens the way to the first steps in monetary easing, expected in the second quarter. These twin falls, in inflation and interest rates, and the encouraging pattern in the bulk of the economic data, fuel the expectations of a soft-landing scenario. But this is not to say that there are no risks or points worthy of continued attention. Geopolitical tensions remain high and capable of disrupting this scenario, most notably through their inflationary effects
BNP Paribas Economic Research wishes you all the best for 2024. On the macroeconomic front, the highlight of 2023 was the peak in official rates in the United States and the eurozone, but what is in store for 2024?In this video, you can discover the topics and points of attention that will be monitored throughout 2024 for each team: Banking Economy, OECD and Country Risk.
The latest economic data paint a mixed picture. In both the eurozone and the US, the signal from most confidence surveys in December is encouraging. But it is still too early to conclude to a bottoming out. Non-farm payrolls in the US remained robust in December. But the collapse of the employment component of the ISM survey in the non-manufacturing sector looks alarming. Business failures are on the rise. The economic situation also remains vulnerable to geopolitical tensions. On the other hand, there is no reason to worry about the inflation rebound in December. And the dynamics appear more favourable in the eurozone than in the US.
Inflation regained ground in the United States and the euro area in December, rising from 3.1% to 3.4% and from 2.4% to 2.9% year-on-year respectively. However, the breakeven inflation rates (10-year bonds) for the four major eurozone economies have fallen below those of the United States. The breakeven rate has also dropped in the United Kingdom, where the inflationary environment has improved, although it remains more deteriorated than in the other areas.
The latest inflation data from the major developed economies have helped fuel the decline in bond yields and reinforced the conviction that the first policy rate cuts will take place in the first half of 2024 in the US, the euro area and the UK.
Inflation remains high but, judging by the latest figures published for the Eurozone, it is much less so and, at first glance, it is no longer very far from the 2% target. Of course, there is still some way to go; the uncertainty relates in particular to how fast the “last mile” of disinflation will be covered, before reaching the 2% target. It is to be expected to be slow rather than quick, partly because favorable base effects on energy prices will play less.
