EcoTV - September 2016 - 9/12/2016

FRANCOIS DOUX

 

Hello and welcome to this summer edition of Eco TV, your magazine tailored by BNP Paribas’ economists. On the menu of this September edition: What’s next until the end of the year? Chief Economist William de Vijlder will give us his global outlook. Next, for ‘The Chart of the month’, we will talk about India. Johanna Melka will tell us why she remains quite cautious despite more than 7% of growth in India. Last, in three questions to Frédérique Cerisier, we will have a look at the impact of the Brexit on the Eurozone. Stay tuned.

 

What to expect till the end of the year in terms of macroeconomics? We are joined by Chief Economist William de Vijlder. Over the summer, markets have been quite well-oriented. Is this the sign that the economy is improving?

 

WILLIAM DE VIJLDER

 

Experience shows that we shouldn’t look too much at markets for economic forecasts. The dominating thematic over the summer has been that central bank action or its prospect, hence liquidity, has been the main driver still. The other important point is that markets have ignored key sources of uncertainty. Brexit and its consequences have been ignored. To some degree because the early evidence in the data was actually quite comforting. The bank stress tests have been ignored. So all in all, liquidity has been driving markets.

 

FRANCOIS DOUX

 

But still the quantitative easing is now much more common among central banks.

 

WILLIAM DE VIJLDER

 

That is why the thematic of global spillovers is dominating. It is very important to see US yields going down whereas the outlook for the data of the second half of the year is getting better. You may wonder why. When the Bank of England is joining the ECB and the Bank of Japan to inject liquidity, it ends up influencing the US yield environment as well.

 

FRANCOIS DOUX

 

What about the economic data?

 

WILLIAM DE VIJLDER

 

On the data front, it very much depends on the country you look at. In the United States, for instance, real time estimates are showing that third quarter should see a pretty good growth performance. In the Eurozone, on the other hand, the first half has been strong and now growth is moderating. This is at least the impression you get looking at sentiment and confidence data. China is the disappointing factor in the sense that there has been a big stimulus effort predominantly on the fiscal side. The budget deficit is on the rise but the economy continues to slow. This is a big point to follow going forward.

 

FRANCOIS DOUX

 

What about emerging markets? We will talk with Johanna Melka about India, with 7% growth still. What’s your view globally speaking?

 

WILLIAM DE VIJLDER

 

Some countries continue to do very well if you look at the absolute growth rate. You mentioned India quite rightly. Even China in the absolute is great. Of course what we’re interested in is the delta of the growth rate. In that respect, what is interesting to emphasize is that in Brazil for instance, there is now clear evidence of some improvement in a couple of months to come. Even in Russia, the outlook is getting a bit better. So here and there, you do see that it is getting a bit better in emerging markets. If you look in the aggregate, at the PMI data for emerging markets, it shows a recovery and this has not gone unnoticed in markets because emerging markets have benefited from substantial inflows.

 

FRANCOIS DOUX

 

Which key elements will you follow till the end of the year to get a good view on the economic side?

 

WILLIAM DE VIJLDER

 

The data remain important as ever; however nowadays central banks are more important because the ECB and the Bank of Japan have clearly indicated in the past that they still have the possibility, the leeway to do more. So now markets will tell us: “Okay, what are you going to do?” That’s the first important point. And the other important point is that it seems very clear now looking at the data, but also looking at the statements of Fed officials, that the Fed will hike before year end. Key question is how that will be digested by the market. My view is that actually the market will look at it as a kind of non-event.

 

FRANCOIS DOUX

 

We will have lots of events on the political side. Elections, referendums and so on all around the world.

 

WILLIAM DE VIJLDER

 

The second very important point to follow is on the political side. The US elections obviously. Depending on the outcome, markets will react quite differently. We will have the opportunity to come back on that later in Eco TV shows. The other point which is important is in Europe. We want to see clarity now. How the Brits will handle their Brexit? It has been very quiet. The other point which is important is the Italian constitutional reform referendum. It is a test for the Prime Minister. And Spain is still struggling to have a new government. There again, there will be elections. And gradually, the eyes will focus on 2017 with the elections in France and in Germany. Very much to happen on the political side.

 

FRANCOIS DOUX

 

A lot of things to follow together. Thank you very much for coming. Next, we will talk about India with Johanna Melka for ‘The Chart of the Month’.

 

FRANCOIS DOUX

 

For ‘The Chart of the Month’, we will talk about India. Johanna Melka, hello. 7.1%, this is the GDP growth in India for the current fiscal year, the first quarter April to June. Is it a good trend?

 

JOHANNA MELKA

 

Indian economic growth decelerated slightly in the first quarter. But it’s a good performance, especially compared with other emerging countries in India.

 

FRANCOIS DOUX

 

What are the drivers of this Indian economy?

 

JOHANNA MELKA

 

The main driver of India’s economic growth is the private consumption. It was fairly robust in this first quarter and should remain very robust, especially thanks to the sharp rise in public wages. The main source of concern is investments. Indeed, investments contracted by more than 3% in this quarter.

 

FRANCOIS DOUX

 

How do you explain this deceleration of investments in India?

 

JOHANNA MELKA

 

Investments contracted due to the deterioration in financial situation of corporations and public banks. Indeed, after the financial crisis in 2009, the debt of corporations increased sharply. Since 2014, corporations were constrained to reduce their debt and to improve their balance sheets. So they reduced their investments. On the overall, we observe that since the end of 2015, there is an improvement in their financial situation. But if you study the details, the problem is that the situation of corporations in industry remains very weak, especially in infrastructures, metals, etc. And in these sectors of activity, public banks are highly exposed to credit risks.

 

FRANCOIS DOUX

 

What is the situation of the balance sheets of the banks?

 

JOHANNA MELKA

 

The financial health of banks has deteriorated. The problem is that last March non-performing loans in public banks reached around 15% of total loans. Consequently, banks have to improve their balance sheet in order to reduce risk and to respect Basel III ratio. In this context, they decreased credit growth. We can observe in this chart that credit growth, especially in infrastructure, has decelerated significantly.

 

FRANCOIS DOUX

 

In the end of the day, you remain cautious about India?

 

JOHANNA MELKA

 

We remain cautious because this deceleration of credit and the weak financial position of corporations weigh on short term growth but also on medium term growth. But the good new is that last July, the GST law passed in the upper house of Parliament. This law should increase significantly the fiscal leeway of the government.

 

FRANCOIS DOUX

 

That’s good news. Thank you very much. Next, back to Europe, we will talk about the Brexit and the Eurozone with Frédérique Cerisier. Stay tuned.

 

FRANCOIS DOUX

 

What is the impact of the Brexit on the Eurozone? Frédérique Cerisier, hello. When we look at the figures, we had a 1.5% year-on-year growth in the second quarter in the Eurozone, that’s not bad. Does that mean that the impact of the Brexit is not that big?

 

FREDERIQUE CERISIER

 

It’s true that recent data are suggesting some resilience in activity during the summer. In the UK, where the prospect of Brexit has an immediate impact on economic growth, we are just starting to see a break. In the Eurozone, we mainly expect delayed and minor impact passing through lowering British demand to Eurozone exports. We are just starting to see some worrying signs in German survey data which is the largest and most open economy in the Eurozone.

 

FRANCOIS DOUX

 

What is really at stake? We don’t see. It’s not really in these data. How will the negotiation take place?

 

FREDERIQUE CERISIER

 

On the long term, the main economic consequences will depend to a large extent on the type of agreement that the UK will try to negotiate with the European Union. Will they try to enter a framework already well defined like the European Economic Area or will they try to negotiate a more tailored-sized  agreement? We cannot exclude at this stage that the EU will have to negotiate simultaneously multiple commercial agreements in various sectors of industry and services with the UK. Regulatory aspects will also come into place, especially in the financial services. At last of course, the ability of EU citizens to work in the UK and the conditions attached to it. It’s obvious that European countries are exposed differently to these channels, that they will have different priorities and even maybe conflicting interests in these negotiations. In the short term, the first challenge for European countries will be to face the UK with a single voice during very complex negotiations.

 

FRANCOIS DOUX

 

Third and last question: this Brexit means a kind of loss in attractiveness of the European Union. Do you think there is a way that the EU ends this process reinforced?

 

FREDERIQUE CERISIER

 

It’s obvious that the Brexit is weakening the European Union and destabilizing it mainly because it changes the balances of forces in several aspects. For instance, balances between Eurozone members and non Eurozone members. Also between members, the most liberal economies, and those, in the Southern part of the Union, more in favour of State intervention. If the EU is to exit stronger from such a process, there are many conditions. The first is that it is clear that the UK has less favourable relationships with the EU when it is out than previously when it was in. Otherwise, it would reinforce eurosceptic trends in many countries. It would fuel a fragmentation process that these eurosceptic parties are calling for. More generally, we could say that EU members could take there the occasion to redefine clearly what membership to the European Union is, what membership to the Eurozone is, what are the duties and rights attached to that, and show that they are credible in implementing these principles.

 

FRANCOIS DOUX

 

Thank you very much. Topic to be followed. See you next month for another edition of Eco TV.