EcoTV - November 2016 - 11/9/2016

FRANCOIS DOUX

 

Hello and welcome to this new edition of Eco TV, your magazine tailored by BNP Paribas' economists. On the menu of this November edition: the Eurozone economy is improving globally. We will have the detailed analysis of Chief Economist, William de Vijlder. Next for "The Chart of the Month", we will talk about Brazil. The recovery is on track. Sylvain Bellefontaine will give us his point of view. Last, in three questions, we will talk about labour regulations in France. Reforms are going on. We will see that with Hélène Baudchon. Have a good show.

 

A somewhat better outlook, this is what is happening in the Eurozone towards the end of 2016. We're joined by Chief Economist, William de Vijlder. When we look at the last PMI composite index in the Eurozone but also at the German IFO, it's much better than expected. Does it mean that the recovery is also faster than expected after the Brexit?

 

WILLIAM DE VIJLDER

 

There was a big concern when Brexit came about the fallout on the European economy, on the Eurozone economy. What we have seen since then is that not only at the UK level the impact has been minimal this far, and in addition to that we now see an improvement of the Eurozone data. So that means that there is not yet a headwind coming from the UK but, in addition to that, other factors play as well. What is particularly important is what is happening on the manufacturing side. Services have been pretty well oriented in the past two years. That's not really the issue. There was a bit of a question mark on manufacturing. There we now see a pick up. We see it in France at the PMI level but we see it clearly in Germany as well. And as you mentioned, the export expectations in Germany have picked up very significantly. To explain that dynamic we must look at China. China was slowing down in the first half of the year. Germany is very sensitive to China. The third quarter has seen an acceleration of Chinese growth compared to the second quarter. So in our view that is already having an impact in Germany.

 

FRANCOIS DOUX

 

German exports are also benefiting from the low level of the euro.

 

WILLIAM DE VIJLDER

 

It still has to come in the sense that we have seen as of late a weakening of the euro versus the dollar. What we've also seen is that emerging currencies have strengthened. That means that the effective exchange rate of the euro has stopped to strengthen on a year-over-year basis. That means that the headwind coming from the earlier appreciation still needs to go through the data but that it will fade away and that on balance the impact on exports should be a bit more positive in the first half of next year.

 

FRANCOIS DOUX

 

Is it time for the ECB to start tapering? I heard the rumour on the news.

 

WILLIAM DE VIJLDER

 

It's good to put it that way because you have two elements. On the one hand, you have this manufacturing dynamism. However, let's not blow it out of proportion because the ECB is the first one to say that the downside risks are still dominating. But still you have some more momentum. On the other hand, you had that article on "Bloomberg" about the Governing Council been agreeing on a tapering. Mario Draghi at the press conference following the Governing Council meeting on October, 20th, has been very clear that it has not been discussed, that the people who talked about this were not informed, etc. Now markets look at this in a different way. They say that the article means there is no smoke without fire. What you can expect is that, against the background of the evolution of the economic data, in the course of next year, the dominating topic in market will be: When will the ECB start tapering?

 

FRANCOIS DOUX

 

We will come back on Eco TV to comment on this. We have also had good news in Spain with a new government finally. Portugal as well has kept its investment grade rating. The situation in southern Europe is also improving.

 

WILLIAM DE VIJLDER

 

We have avoided a big concern, of course. The question mark on Portugal was that if it would no longer be “investment grade” the Portuguese bonds would no longer be eligible for ECB quantitative easing. The news was like a sigh of relief. In Spain of course it is important as well. You can look at this as a kind of a test: Is there an ability in European countries to come with a government and to take the necessary measures. From that perspective the news is a relief.

 

FRANCOIS DOUX

 

Next on the list is Italy.

 

WILLIAM DE VIJLDER

 

Italy is important, the 4th of December referendum is important. There is an increase in market nervousness. The spread vis-à-vis Bunds has been rising trendwise for several months now. It's an important referendum on constitutional reform. We will see how it will turn out.

 

FRANCOIS DOUX

 

We will follow this on Eco TV and on Eco TV Week. Thank you, William. We will talk about Brazil with Sylvain Bellefontaine. This is "The Chart of the Month".

 

 

FRANCOIS DOUX

 

After two years of recession, the road to recovery seems on track in Brazil. Sylvain Bellefontaine, hello. To illustrate this topic, we have two charts here: the forex rate and the stock index. Could you explain us this evolution?

 

SYLVAIN BELLEFONTAINE

 

Over the past two years, the Brazilian economy suffered a very deep recession. It is due to structural weaknesses in the economy, a less favourable global environment and above all the political crisis in the country triggered by the corruption scandal two years ago.

 

FRANCOIS DOUX

 

How deep is the slowdown here?

 

SYLVAIN BELLEFONTAINE

 

Both indicators, the nominal FX rate and the stock index, tumbled by 40%.

 

FRANCOIS DOUX

 

And now we see a turning point at the beginning of 2016. Why?

 

SYLVAIN BELLEFONTAINE

 

The markets have definitely turned green since the beginning of this year. It is due to the recovering confidence in the markets. The markets have endorsed the president Rousseff's impeachment and the new president's reform agenda. We can see that both indicators are skyrocketing.

 

FRANCOIS DOUX

 

And the risk premium has also improved in Brazil.

 

SYLVAIN BELLEFONTAINE

 

In this second chart, you can see that yields on 5-year Treasury bonds and risk premium on the CDS market declined markedly.

 

FRANCOIS DOUX

 

The next question is: Are these markets right to anticipate a recovery?

 

SYLVAIN BELLEFONTAINE

 

Yes. For one year, we've been expecting that this summer could be - or should be - a turning point in the economic recovery. According to leading indicators, the recovery could be postponed.

 

FRANCOIS DOUX

 

What are the drivers of this recovery? We know it's postponed for a few months. But what are the drivers?

 

SYLVAIN BELLEFONTAINE

 

The main driver is investment, definitely. But at the same time, consumption should remain subdued because the labour market is very depressed. And there is also some uncertainty in the political sphere due to the implementation of the reform agenda that enjoys very little public support.

 

FRANCOIS DOUX

 

Last question: What is your forecast of the Brazilian economy for 2017?

 

SYLVAIN BELLEFONTAINE

 

For 2017, we expect growth to be between 1.5% and 2%.

 

FRANCOIS DOUX

 

Thank you very much. Next, we will come back to France with Hélène Baudchon to talk about the labour regulation and the economic impact. Stay tuned.

 

 

FRANCOIS DOUX

 

Economists are asking for more and more reforms. In France, we had the labour regulation reform this year driving a lot of protests. Let's have the economic point of view with Hélène Baudchon.

 

FRANCOIS DOUX

 

My first question: Why such a reform in France now? What is it about?

 

HELENE BAUDCHON

 

Reforming the labour code is the government's latest attempt to improve the functioning of the French labour market, stimulate jobs and reduce unemployment. Indeed, France's cumbersome, complex labour regulations, and strong job protections contribute to the rigidity and duality of the labour market, which is one of the reasons put forward for the country's high unemployment. The reform therefore aims to provide companies with greater flexibility and visibility in managing their workforce in order to encourage them to hire more, notably via open-ended job contracts. To achieve this, one of the basic principles of the reform is to place greater emphasis on collective bargaining at the company level.

 

FRANCOIS DOUX

 

Second question: What about companies and workers? What does it change for them? Is it simpler at the end of the day?

 

HELENE BAUDCHON

 

For companies, we will keep in mind the following changes: The reform clarifies the rules governing the economic redundancies. It also increases again the possibilities for waiving the 35-hour workweek. The conditions for overtime pay can also be revised in a less favourable way. The labour reform also extends the scope of job protection agreements. In addition to a "defensive" version in case of cyclical troubles, the reform adds an "offensive" version to deal with an increase in business activity. An important point is that any changes must be approved by a majority vote at the company level. For workers, the reform focuses on the creation of "personal activity accounts", whose aim is to help and foster job security by ensuring the portability of labour rights. It will take time to know whether this reform of labour regulations makes them any simpler and easier to understand. We will have to wait for the first feedback to know whether - and to what extent - companies and unions take these changes to heart.

 

FRANCOIS DOUX

 

Third and last question: What is the impact of this reform on the French economy? Will that be enough?

 

HELENE BAUDCHON

 

As I just said, it will take time for this reform to generate the desired effect. Assuming that it does have an impact, since this cannot be taken for granted yet. Important changes were made to labour regulations, but it remains to be seen whether they are big enough to make a difference. Strengthening the social dialogue is a particularly hard goal to reach. Besides, the impact of the reform on employment is ambiguous. It is supposed to boost hiring, but at the same time, it is also likely to lead to more firing as well, at least in the near term. Consequently, the net impact is for the moment uncertain. The expected moderation in unit labour costs is also a two-edged sword. On the one hand, it is a way to improve corporate competitiveness, and, thus, eventually, jobs. On the other, it strains wages and consumer consumption, which, in turn, weakens employment. What is the dominant effect? And in what timeframe? It seems that the negative impact on demand is the most important in the short term before the positive impact on supply wins out in the long term. To conclude, the labour reform is a necessary one, but it must still prove its worth as an effective way to reduce unemployment.

 

FRANCOIS DOUX

 

Thank you very much for this overview on labour regulation in France. See you next month for the last edition of Eco TV for 2016. Stay tuned.