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. »
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In the European Union, CO2 emissions from fossil fuel combustion declined 2.5% in 2018 compared to the year before. Considering that GDP grew, this implies a reduction in carbon intensity, thereby continuing a long-term trend. The developments in individual countries vary and quite a number of countries have seen an increase in emissions. Likewise, the differences are considerable concerning the emissions per capita depending on the level of economic development, although this is just one factor amongst many which influence the emission intensity.
According to Jerome Powell, the fundamentals supporting the US economy remain solid. First quarter growth has been robust but underlying concerns about the quality of growth have emerged. Growth has benefitted from a drop in imports and rising inventory levels while residential investment acted as a drag. In the coming months, imports should rebound and inventories should witness a scale back. The onus will fall on consumer spending and corporate investment to neutralise the effects of these anticipated headwinds on growth.
The relationships between government debt, economic growth and interest rates are complex and varied. In general, a recession causes an increase in government debt and a decline in government borrowing costs. A prolonged period of monetary accommodation during a cyclical upswing can cause the average nominal interest rate on government debt to drop below the rate of nominal GDP growth. Depending on the level of the primary balance, such a situation can, under certain conditions, create leeway for fiscal expansion in order to support growth.
The first quarter turned out to be strong after all. The just released first estimate for first quarter GDP showed an annualised quarter over quarter increase of 3.2%, ahead of the consensus number of +2.3% and better than the previous quarter (+2.2%). Data released earlier this month had suggested that March looked good though not great.
Recent data in China and the eurozone point towards a stabilisation of growth and have been met with relief. Although the US economy is slowing, growth should remain at a satisfactory level in the near term. Yet there are lingering concerns about the underlying strength of the global economy. The IMF has again scaled down its forecasts and only expects a modest growth pickup later this year. The flattening of the US yield curve fuels worries that growth will disappoint. The Fed insists it is confident about the outlook and patient in setting its policy. Markets have welcomed this accommodative message. Yet the signals sent by equity and bond markets about future growth are quite different. It only adds to the list of concerns.
The pass-through of wage growth to prices is stronger and faster when inflation is higher to start with. The low inflation in the Eurozone has slowed down the transmission. The considerable growth slowdown, on the back of adverse foreign demand and uncertainty shocks, impairs this process even more. This raises pressure on the ECB to take action in order to dislodge core inflation, which remains stuck well below its objective
The different uncertainty measures are sending mixed signals. The Economic Policy Uncertainty Index, which is based on media coverage about policy uncertainty, is no longer increasing but a downward trend has not yet started.
President Trump has argued that the US economy would get a boost if the Federal Reserve were to cut rates. The minutes of the FOMC show the members are confident about the growth outlook. The outlook for inflation, against a background of global uncertainties, allows them to be patient in terms of policy. The IMF in its latest Global Financial Stability Report expresses concern about how high debt levels weigh on the resilience when faced with significantly slower growth or higher borrowing costs. This implies that Fed policy will not only be confidently patient but also patiently vigilant.
Strong job creation in March in the US has brought relief after the disappointing data the month before. The Chinese manufacturing indices have rebounded and crossed the 50 level. In the eurozone, the pressure on the manufacturing sector continues but the services PMI has improved. Retail sales have beaten expectations. For the manufacturing sector, a lot will depend on how uncertainty evolves. In this respect there are hopeful signs. The likelihood that an agreement will be reached between the US and China has increased whereas in the UK, cross-party negotiations seek to avoid a hard Brexit.
After last week’s poor flash PMIs, data published this week show a mixed picture. The European Commission’s Economic Sentiment Index continues to decline in a large number of countries and for the eurozone as a whole as well. IFO data for Germany show an improvement in the overall climate though manufacturing continues to go down. INSEE data for France show a stabilisation or even some modest improvement. All in all there are some hopeful signs but it would be premature to conclude that the growth slowdown is about to end. April data will be particularly important.
The growth projections of the FOMC members have been revised downwards and the unemployment projection has seen an upward revision. The projections for the federal funds rate (the “dots”) have dropped 50 basis points. The Fed chairman considers the outlook to remain favourable, adding that it is a great time to be patient. Markets are less upbeat. They interpret patience as an underlying concern about downside risks and price a rate cut in the course of next year. We expect the policy rate to stay at its current level, this year and next.
The plethora of data released this week didn’t remove concern about the Chinese growth slowdown. Lunar holiday bias and the recent fiscal stimulus measures imply it is too early to draw firm conclusions. The matter is important for the global economy given China’s weight. It is also important for key exporters to China such as Germany. Against this background, reaching a trade agreement with the US becomes key.
The Federal Reserve will conduct a review of its monetary policy framework and the conclusions will be made public in the first half of 2020. Three questions will be addressed: should the monetary policy stance take into account past misses of the inflation objective? Are the tools adequate? How can communication be improved? The initiative should be welcomed because it shows the Fed’s efforts for being ready when the next recession hits. Facing similar challenges, the ECB is likely to be interested in the outcome of the Fed research.
When households (companies) feel more uncertain, they will spend (invest) less. After a jump last year, the number of media articles mentioning uncertainty, has declined somewhat recently (top left chart).
The latest survey data show a very mixed picture. In the manufacturing sector, China saw some signs of stabilisation, whereas Japan experienced a deterioration. In Germany, manufacturing remains under pressure. The picture in the eurozone is quite diverse, depending on the country and the sector. Looking at the broadest survey indicator for the eurozone, one observes a stabilisation. Whether this will be confirmed depends to a large degree on developments in China and on the well-known sources of uncertainty (trade, Brexit).
Considering its considerable weight in world GDP, slower growth in China causes spillover effects. Over the past 12 months, countries which are more exposed to China in terms of exports have seen a bigger drop in their new export order assessment. In Germany there is a close correlation between the Chinese purchasing managers index and the assessment of exports in the PMI. This shows that Germany and, by extension, Europe as a whole should hope that recent Chinese growth support measures will be successful.
Since early 2018, based on the purchasing manager indices, a large number of countries have witnessed a decline in the assessment of new export orders which was bigger than the decline of the general climate in manufacturing. This suggests a dominance of foreign demand shocks, rather than domestic shocks, in explaining slower overall growth. The drop in new export orders echoes the significant slowdown in world trade growth. This is probably related to slower Chinese growth and, in many countries, slower growth in capital expenditures, which have a higher import content than consumption. Trade-related uncertainty may also play a role.
The European Commission now expects 1.3% growth for the eurozone this year, down from 1.9% in its previous forecast. This downward adjustment doesn’t come as a surprise, considering the declining trend of several survey indicators. The recent performance of these indicators in tracking GDP growth is mixed, which makes the assessment of the current growth momentum challenging.
Although US growth remains strong, global headwinds, softer survey data and tighter financial conditions have put the FOMC in risk management mode. Policy remains data dependent, but a patient stance will be adopted before deciding on the next move in monetary policy. Inflation, which remains well under control, facilitates this wait-and-see attitude. Markets are now pricing in a policy easing in the course of 2020. More than anything else, this shows to which extent uncertainty has taken its toll on confidence.
The recent “economists’ statement on carbon dividends” offers important policy prescriptions for the US to address global warming. It explicitly refers to the need for a border carbon adjustment system so as to maintain competitiveness versus countries that would not have introduced a carbon tax. The authors recommend that the carbon tax proceeds be equally distributed to US citizens. It could be envisaged to use these proceeds in a way which takes into account the distributional aspects of environmental taxes whilst promoting energy efficiency investments.
The slowdown is spreading widely. Although it is reasonable to expect growth to normalise, several sources of uncertainty (fears of a trade war, Brexit, the US government shutdown, etc.) are acting as headwinds. China has already announced new measures, and in the United States, the Federal Reserve is insisting on its patience (concerning inflation) and flexibility when it comes to adapting monetary policy.
Market reaction suggests that the parliamentary vote, with a wide majority, against the Brexit deal which had been negotiated with Europe, has reduced the likelihood of a no-deal Brexit. Whether this feeling of relief lasts will depend on how the discussions on possible outcomes evolve. The economic headwind which comes with this prolonged uncertainty, for the UK but also for the companies in the EU which trade with the UK, will not go away soon.
The economic policy uncertainty index, which is based on media coverage of this topic, has seen a huge increase since the middle of last year, even surpassing the previous high reached at the end of 2016. Measures of business uncertainty in Germany and the US have also risen. The dispersion of individual stock returns, a third measure of uncertainty, has also increased in the US and to a lesser extent in the eurozone.
Fed chairman Powell has recently emphasized that the FOMC will be patient given the muted inflation reading and that it is ready to shift the policy stance swiftly if required. He also considers that financial markets are pricing in downside risks well ahead of the data. This means that they are too pessimistic on growth. Professional forecasters' estimates of the probability of entering into recession in the coming quarters do not display the typical pre-recession dynamics either.