EcoTV - May 2016 - 5/10/2016

EcoTV - May 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 May edition of 2016: Is the world circular or flat? This is the question that will be tackled by Chief Economist William De Vijlder. Next, for “The Chart of the Month”, we will talk about the conundrum of the labour market in Japan with Caroline Newhouse. And last, in three questions, we will mention Saudi Arabia and its Vision 2030 plan with Pascal Devaux. Stay tuned.

 

FRANCOIS DOUX

 

When we look at the global outlook for economic policies, we always see whether in China, the Eurozone or the US, that each economic decision has an impact on the other zones. William De Vijlder, hello. You titled this interview “The World is Circular” because of the ‘non-autonomy’ of the economic policies. Is that linked to the well-known book of Thomas Friedman “The World is Flat”?

 

WILLIAM DE VIJLDER

 

There is indeed a bit of a link. Thomas Friedman’s book is about how globalization is influencing business models, about the offshoring towards emerging economies for instance. The link with “the world is circular” is that my analysis starts with the observation that China has become very important for the Eurozone, for the US, directly and indirectly, but also vice versa. Indeed, you have a three-pillar world economy.

 

FRANCOIS DOUX

 

How does make it circular then?

 

WILLIAM DE VIJLDER

 

To make it circular, you need to look at international trade and then link it with capital markets and financial flows. And then you will observe that for instance statements made by Janet Yellen not only have an impact on Wall Street but also on capital flows towards emerging markets. And also that news from China has an impact on Wall Street for instance. That last point is a very important one as clearly documented in recent research by the IMF. This is a new development.

 

FRANCOIS DOUX

 

Let’s dig into the real world. Can you give us an example?

 

WILLIAM DE VIJLDER

 

Let’s look at what happened since the middle of last year. Around the middle of 2015, what did the world economy look like? We had emerging economies suffering from a commodity shock with a big negative impact on growth. You had China facing major financial turmoil: the stock market bubble had burst. And in the US, you had the prospect of Fed tightening.

 

FRANCOIS DOUX

 

What happened then?

 

WILLIAM DE VIJLDER

 

These three forces were kind of mutually reinforcing. But what is important is that this also triggered a strengthening of the dollar. This strengthening meant that actually it was creating a headwind for the US economy.

 

FRANCOIS DOUX

 

When we see it now, what does it mean for the future?

 

WILLIAM DE VIJLDER

 

It means that we have to look subsequently at what happened. There was a headwind for the US economy because of the dollar strength and as a consequence, the Federal Reserve adopted a more dovish tone. In the meantime, things improved in China as well. Because of the more dovish tone coming from the Fed, there was a relief about the prospects for emerging market currencies which started to strengthen with capital flowing back to emerging economies. And as a consequence, the dollar weakened against emerging currencies. You see action-reaction: action in emerging countries causing a headwind for the US, reaction in the US bringing a relief in emerging countries.

 

For the future, it means that when we make forecasts about the economy and policy stance, we need to focus on spillover effects, consequences of Chinese actions for the Eurozone, US actions for the emerging countries. That is point number one.

Point number two which is important, is that we can only observe, as you said in your introduction, that there is now a world of reduced policy autonomy. Even the Federal Reserve needs to take into account the constraints  because of the fact that the world is totally globalized in terms of international trade or capital flows.

Thirdly, and this is a very concrete constraint which is now imposed upon the Fed, is that it makes it very difficult to create leeway to fight the next recession:  to be able to do that, you need to hike interest rates. And there will be negative spillover effects on the rest of the world economy which is then going to circle back to the US. It means that it makes it a very constrained monetary environment.

 

FRANCOIS DOUX

 

Thank you very much. Next, we will talk about a country a bit more isolated of this circular world: Japan. This is “The Chart of the Month” with Caroline Newhouse.

 

FRANCOIS DOUX

 

For ‘The Chart of the Month”, we go to Japan with Caroline Newhouse. When we look at the Japanese economy, growth is still weak, inflation as well but what about the labour market?

 

CAROLINE NEWHOUSE

 

The labour market is in a quasi-full employment situation. The jobless rate in February 2016 is at its lowest level in almost 20 years. The ageing of the population is probably one of the explanations as the working population has been decreasing since 1997. But it is quite interesting to see that this decrease in the working population has stopped in the recent years thanks to the decision of M. Abe’s government to increase the participation rate of women, youth and seniors. Nonetheless, the conditions on the job market are very tight. This can be seen through the evolution of job–to-applicant ratio which is above 1% since almost two years. Indeed, at 1.28% in February, it has been at its highest level since almost 20 years.

 

FRANCOIS DOUX

 

The title of this chart is “The Conundrum of the Japanese Job Market”. Where is it?

 

CAROLINE NEWHOUSE

 

You can see this conundrum when you look at the wages line. Wages have effectively stopped to decline in 2011 but they are now stagnating, whereas the situation of the corporates is very good, the environment is really business-friendly with a weak yen, which is very interesting for exporting companies, but also with a stimulus package which has been implemented in order to boost growth. The government has also announced a cut in the corporate tax. But we don’t see wages accelerating yet.

 

FRANCOIS DOUX

 

Do you have some explanation? I guess it is not that easy to find.

 

CAROLINE NEWHOUSE

 

There are probably two explanations at least. The first one could be the fact that the ageing of population has been diluting gradually the specificities of the job market. While in the 70s the Japanese employee was employed during his whole working life by a single corporate, now we see that different job contracts are emerging, part-time contracts or temporary contracts. And those new sorts of job contracts are benefiting wages which are lower than permanent contracts. This is probably one explanation. A second explanation could be about exporting companies, large ones, which have large benefits. They have shifted their production overseas in order to be closer to their exporting markets and they neglected their domestic market.

 

FRANCOIS DOUX

 

Thank you very much for this overview of the Japanese labour market. Next, we will talk about Saudi Arabia with Pascal Devaux. Stay tuned.

 

FRANCOIS DOUX

 

Lower dependence on oil revenue and a more diverse economy, these are the two objectives of Saudi Arabia that has announced the Vision 2030 plan. Pascal Devaux, hello. First question: what is the situation of Saudi Arabia in terms of fiscal policy and growth?

 

PASCAL DEVAUX

 

We can say that the situation is not very good for Saudi Arabia. Even if oil prices have rebounded since the beginning of this year, we will have a heavy budget deficit this year by about 15% of GDP. And as a consequence, the public debt will increase even if it remains at a rather moderate level. But the main consequence is that the government has done some cut in expenditures, especially in investments. Those cuts in expenditures have led to some postponement or cancelation of investment projects and to some lay-off, notably in the construction sector. The main consequence of these cuts in public expenditures is on economic growth. This year, we expect a drop in economic activity with 1.3% of real GDP growth this year against 5% on average during the last five years.

 

FRANCOIS DOUX

 

Hence we see the need of reforms. This is my second question: What is inside this Vision 2030 plan?

 

PASCAL DEVAUX

 

There are two categories of reforms. The first strictly concerns fiscal reforms, notably cut in subsidies, especially for water and energy, and the scheduled introduction of VAT but not before next year or the year after. The second category of reforms is more structural. They aim at diversifying and opening the Saudi economy. The government announced these measures in the Vision 2030 plan, such as the creation of a big sovereign fund in order to diversify the sources of income. Another measure is the privatisation of some public assets, notably part of Aramco which is the national oil company and health care services as well. And other measures aim at attracting foreign direct investments and some others aim at improving human capital for the Saudi population.

 

FRANCOIS DOUX

 

Third and last question: What is your point of view as an economist about the future of Saudi Arabia thanks to these reforms?

 

PASCAL DEVAUX

 

We always have to be very prudent with reforms in Saudi Arabia because this country is very slow to reform. From my point of view, I expect that those reforms will have positive consequences on the fiscal side in the short and in the medium term. But structural reforms will be more difficult to implement and they will have positive impacts, if any, only in the medium and long term.

 

FRANCOIS DOUX

 

Thank you very much for this overview on Saudi Arabia. See you next month for the 100th episode of Eco TV with lots of surprises. Stay tuned.