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After the holiday season, mounting challenges 9/11/2018

The protectionist threat has been grabbing headlines but this hasn't stopped Wall Street from reaching new highs, supported by growth in earnings and the perception of a dovish Fed.

TRANSCRIPT // After the holiday season, mounting challenges : September 2018

François Doux: As we approach the last part of 2018, we will now talk about the economy with William de Vijlder. Hello.


William de Vijlder: Hello François.


François Doux: As the chief economist of BNP Paribas, you must also keep an eye on what is happening in the financial markets. Wall Street keeps breaking records. Is there an economic justification for the financial markets’ record highs?


William de Vijlder: That has been the subject of lots of debate. On the one hand, Wall Street’s record highs clearly show the role played by monetary policy and the Federal Reserve’s extremely cautious approach, which for market operators, has inspired a lot of confidence. Another major point is the very strong cyclical position of the US economy, which is driving earnings. The only sour note in this bullish market is that protectionist threats do not seem to have had an impact yet. That means that if the situation deteriorates, it could trigger an even bigger impact on Wall Street.


François Doux: Will strong US economic growth end up fuelling a little too much inflation?


William de Vijlder: We expect to see more inflation. As an economist, I would even say we are growing somewhat impatient.

As a market operator, however, it is a big relief that there is no inflation. Moreover, Mr. Powell, who has headed the Federal Reserve for the past several months, repeated at Jackson Hole that he was rather serene when it comes to inflation. The Federal Reserve’s message is extremely subtle. On the one hand, it is saying that it will continue to tighten monetary policy gradually, and that it will remain vigilant.

And on the other hand, it is also saying that monetary policy depends enormously on economic data. Why? Because it would be extremely risky to restrict its hand to a few easy formulas, such as the equilibrium interest rate or natural unemployment rate.


François Doux: So what is your scenario for the Fed?


William de Vijlder: We continue to foresee two more rate increases this year and an additional one in early 2019. Thereafter, it will all depend on how the economy evolves. From this perspective, it is important to keep in mind that the impulse, driven by higher public sector spending and tax cuts this year, will be smaller in 2019.

We must also keep in mind that higher interest rates will eventually have an impact, on activity in the construction sector, for example. The stronger dollar could also curb exports somewhat. I would say that the first quarter, and even the first half, will be extremely important for evaluating whether the Federal Reserve will adapt its policy rates.

For the moment, the Fed continues to say that there will be several more tightening moves, even in 2019.


François Doux: One last question on the US President Donald Trump, who talks a lot about trade sanctions. Protectionism is on the rise. As an economist, do you see this movement as having a negative impact on growth in the short to medium term?


William de Vijlder: The classic response is: that depends. But concretely, what can we observe? For the moment, the impact has been extremely small. There was a dip in the assessment of export orders, but that must be seen in the light of the global economic slowdown in the first half of the year.

Based on German business surveys, for example, companies do not seem to be much more worried. Another factor worth keeping in mind is that the United States and Mexico have managed to reach a trade agreement. The Canadians are under strong pressure to come on board, and there was also a message for Europe to accelerate things. Even so, let’s keep our feet on the ground: the real focus of attention is on trade relations between the United States and China. Negotiations are bound to be long and tough, and there is a risk that this situation could have a much more significant economic impact.


François Doux: We will keep this analysis in mind in the months ahead. Thank you, William De Vijlder. In a moment we will talk about the emerging markets, and Turkey in particular.

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