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. »
+ 33 1 55 77 47 31 william.devijlder@bnpparibas.com
Recent business surveys suggest that the cyclical environment in the Eurozone, Germany and France is stabilising but it would be premature to call it a bottoming out. Such a positive development seems unlikely in the near term. Monetary policy is expected to remain tight for some time and part of the effect of the past rate hikes still needs to manifest itself. Bank lending policy is expected to remain cautious because of rising credit risk in a stagnating, high interest rates economy and credit demand from firms and households is weak. Significant progress in terms of disinflation seems to be a necessary condition for a lasting upturn in the economic outlook.
Several central bankers have recently insisted that the ‘last mile’ in the marathon towards the inflation target may be the most challenging. After an initial swift decline of headline inflation on the back of favourable base effects due to lower energy prices, further disinflation may take more time. Corporate pricing power, inflation expectations and wage growth play a key role in this respect. By insisting on the ‘last mile’, central bankers probably want to avoid sounding too optimistic on disinflation. Otherwise, financial markets might price in early rate cuts, which would cause an easing of financial conditions in capital markets that would neutralize part of the monetary tightening
Monetary policy desynchronization between the Federal Reserve and the Bank of Japan (BoJ) has become huge. This has caused a significant weakening of the yen. Higher US yields have also exerted upward pressure on JGB yields, which in turn has forced a gradual adjustment of the BoJ yield curve control policy (YCC). Inflation developments in Japan increase the likelihood of a policy rate increase but policy normalization is a delicate task for domestic reasons as well as international spillovers. The BoJ has chosen a cautious approach, with very incremental steps, but in the meantime the yen has continued to weaken, creating the risk of a snapback once policy is tightened. Acting sooner rather than later seems to be the recommended route for the BoJ.
Rather than slowing down, which is what one would expect considering the cumulative tightening of monetary policy, US growth has been stellar in the third quarter. Household consumption has been a key contributor to this performance but public spending, inventory rebuilding and a rebound in residential construction have also underpinned growth. It is to be expected that growth will slow down going forward. High mortgage rates will weigh on construction activity, there is a risk that companies will prefer to reduce their inventories if they expect softer demand and there are limits to how far households will want to reduce their savings rate and run down their excess savings accumulated during the pandemic.
The geopolitical risk index, which is based on the number of newspaper articles mentioning adverse geopolitical events, has recorded a huge increase in October. Whether this influences decisions of households and firms depends, amongst other things, on the (ir)reversibility of these decisions. Based on empirical research on the consequences of a significant increase in uncertainty, there is a concern that the recent jump in geopolitical uncertainty would directly and indirectly -via energy price uncertainty (oil, gas)- weigh on discretionary household spending and hiring decisions by companies, with both reactions potentially reinforcing each other. Considering that these decisions are easily reversible, the impact could be rather swift
The September data show that disinflation continues in the Eurozone. Moreover, this development is broad-based and for more than half of the HICP items, 3-month inflation is below the ECB’s target expressed on an equivalent basis. This increases the likelihood that the decline in inflation continues to spread through the Eurozone economy. However, despite the progress, inflation remains well above target. This implies that, if going forward monthly core inflation would correspond to the ECB’s target (expressed as a monthly number), it would still take until September next year for it to get back to 2% in terms of annual inflation
In the US and several European countries, gross public sector borrowing requirements are expected to remain sizeable and the reduction in the size of central banks’ balance sheets -quantitative tightening- complicates matters. The impact on bond yields will depend on the risk-bearing capacity of investors. Their ability and willingness to increase their exposure to duration risk depends on several factors: the existence or absence of strict duration risk limits in portfolios of institutional investors, risk aversion in reaction to recent bond yield volatility, uncertainty about the outlook for official interest rates, the correlation between bonds and equities, the balance sheet capacity of financial intermediaries
In this series of two podcasts Andrew Craig, co-head of the Investments Insight Center at BNP Paribas Asset Management, interviewed William de Vijlder, group chief economist of the Economic Research of BNP Paribas regarding the central banks policies to fight inflation. Among the questions answered in the first episode are: Are we at the peak or can we expect further rates hikes? Is the inflation going to declines? at which pace?
In the second and last episode of the series on central banks and their fight against inflation, Andrew Craig and William de Vijlder are looking beyond the peak and discuss what will come next. Among the questions are: how long will central banks hold rates at these levels? How long will they plateau at these current levels? what come after that?
US Treasury yields have increased significantly since the end of July and this movement has accelerated in the past three weeks. It seems that the increase in the term premium has been a key driver although there is ambiguity about the underlying causes. There is no ambiguity however on the economic consequences: they are negative. A key channel of transmission is the housing market. Credit demand in general should suffer and another factor to monitor is the equity market considering that the earnings yield of the S&P500 is now lower than 10-year Treasury yields. All these factors represent a headwind to growth and may convince the FOMC that an additional rate hike before the end of the year is not warranted
Elevated inflation has forced central banks across the globe to tighten monetary policy aggressively. When we look at the United States and at the Eurozone, we observe nevertheless that many hard data show a high degree of resilience.
Inflation in the Eurozone is declining and recent survey data point towards a possible stabilisation of economic activity. However, inflation remains well above target and business sentiment has reached a (very) low level. Based on the historical relationship, the current level of the S&P Global composite PMI and the economic sentiment index of the European Commission point towards, at best, a stagnation of activity in the coming months. Whether growth will turn out to be higher or lower will largely depend on how the environment will change. Downside risks are the delayed effect of past monetary tightening and, to a lesser degree, the recent rise in energy prices and the weaker growth environment in China
BNP Paribas Chief Economist William De Vijlder interviews Hélène Baudchon, Head of the OECD Economic Research team; Richard Malle, Global Head of Research at BNP Paribas Real Estate; and François Faure, Head of the Emerging Markets and Country Risk team. They take stock of the global economic situation against a backdrop of inflation, rising interest rates and monetary tightening by central banks. Are we coming to the end of this monetary tightening cycle? What are the impacts on economic growth and financial markets? Have official rates reached a peak in the eurozone or the United States? What influence has the rise in interest rates on the property market? What is happening in emerging countries? These questions will be addressed in three chapters. Enjoy your viewing!
In the world of central banking, nothing is what it seems. The ECB’s recent rate hike was considered dovish whereas the pause by the Federal Reserve received the label hawkish. These reactions show that, beyond the rate decision, the accompanying message also matters. That of the ECB was interpreted as signaling that the terminal rate had been reached. In the US, the latest rate projections of the FOMC members -the dot plot- point toward another hike before year end and a federal funds rate that would stay elevated for longer. This is unsurprising given the resilience of the US economy in reaction to the aggressive monetary tightening and the concern that bringing inflation back to the 2% target would take more time
In its latest meeting, the ECB Governing Council decided to tighten policy further, bringing the deposit rate to 4.00%. It considers that the current level of official rates, if maintained for a sufficiently long duration, will make a substantial contribution to bring inflation back to the 2% target in a timely way. Financial markets rallied, expressing a conviction that policy rates have reached their cyclical peak. The focus is now shifting to how long they will stay at this level and what will be the pace of easing thereafter. The ECB’s reaction function depends on the assessment of the inflation outlook in the light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission
There is broad agreement amongst researchers that population ageing has a detrimental impact on economic growth through a reduction in the working-age population. There is less agreement on the impact on inflation, which amongst other things is influenced by age-dependent spending and savings behaviour. Wage developments will play a key role. A shrinking labour force could create structural labour market bottlenecks in certain sectors, trigger a ‘war for talent’ and force companies to pay higher wages and raise their selling prices. This would spill over to the rest of the economy
Stylised facts are recurring patterns between economic variables and between economic variables and financial markets. They are conditioned by the economic environment and shape expectations of households, companies and investors. They are also used when producing economic forecasts. In the current cycle, there is doubt whether certain stylised facts still apply. In the US, the economy is still growing despite a significant yield curve inversion and aggressive rate hikes. In the Eurozone, the labour market thus far has been resilient notwithstanding the actions of the ECB. Moreover, financial market investors are undeterred by the talk by economists about recession risks. Several factors help to put these, at first glance puzzling observations, into perspective
Recently, the word uncertainty has been frequently used by the Federal Reserve and the ECB in their communication. It is something they must take into account when taking policy decisions. Likewise, households, firms and investors face different types of uncertainty. That of not exactly knowing the current state of the economy, uncertainty about future economic policy and monetary policy in particular, uncertainty about the transmission of past shocks -including interest rate hikes- and the risk of events -geopolitical, climate-related, etc.- that would have economic repercussions. Every month, the European Commission asks firms and households how difficult or easy it is to make predictions about their future business or financial situation
In the coming quarters, economic growth in the United States and the Eurozone should slow down and core inflation should move significantly lower. Monetary policy works with long and variable lags, so part of the impact of higher rates still needs to manifest itself. This is taking more time than expected. It has been a long wait thus far. In the US, the economy in general has been particularly resilient although some data have softened as of late. In the Eurozone, the labour market remains strong, yet, many data have weakened, including in services. A factor that will also play a role in coming months are the developments in China where activity indicators published during the summer confirmed the rapid slowdown in growth
The latest quarterly survey of the European Commission of factors limiting the production of companies shows that few services companies mention insufficient demand as an issue. The score of the financial factor is on the rise but remains below average. Supply side factors remain at exceptionally high levels. A priori, one would expect that the combination of strong demand and constrained supply will influence the price setting behaviour of companies. However, regression analysis shows that these factors only explain a small part of the fluctuation in services inflation. Wage growth and the input prices PMI do a far better job. They will need to see a significant decline for services inflation to converge to 2.0%. This will take time.
Each quarter, the European Commission asks companies about the factors limiting their production: insufficient demand, supply constraints (labour market, shortage of material and/or equipment) and a financial factor. The survey can help in getting a better understanding of the inflation drivers. A quantitative model of producer price inflation suggests that the pace of disinflation will be slow considering that, contrary to the demand factor, which is close to its long-term average, supply factors in industry continue to act a constraint on production far more than is the case normally. Although the analysis was conducted in terms of producer price inflation, given its close relation with consumer price inflation (HICP) in the Eurozone , the conclusions are also relevant for the latter.
Since last weekend, the summer holiday season has really started and based on media reports as well as business surveys, activity in the tourism sector should be strong. Pent-up demand probably plays an important role, considering that tourism expenditures and nights spent in hotels are still below pre-Covid-19 levels. Another factor is the strong rebound in consumer confidence on the back of a more positive assessment of the economic outlook and the personal financial situation as well as a more benign view on the inflation outlook. The stock of excess savings accumulated during the lockdown may also play a role as well as changes in the allocation of household spending. Going forward, the outlook will probably be more challenging.
For economists and central bank watchers, the ECB conference in Sintra (Portugal) and the Federal Reserve conference in August in Jackson Hole are the highlights of the summer season. As always, the presentations and panels at the Sintra conference were very stimulating but also sobering. Disinflation is too slow, there are upside risks to inflation compared to the pre-pandemic era, policy rates will have to remain elevated and economic forecasting is more challenging than ever.
The interest rate projections (‘dots’) of the FOMC members represent a reference point that can help investors and economic agents in general in forming their own interest rate expectations This can be particularly welcome when the monetary environment is changing swiftly like has been the case over the past two years. To explore this, a comparison has been made between the federal funds rate projections of the Survey of Market Participants (SMP) and those of the FOMC members. It seems that the dots may play a role in anchoring long-term interest rate expectations. The private sector forecasts closely follow the dots for 2023 and to a lesser extent for 2024, beyond which they are essentially stable. This is important considering that it might influence the pricing of bonds
The significant and fast paced monetary tightening by major central banks and the prospect that more is to come raise the concern of a monetary ‘overkill’. This could happen due to a non-linear reaction of economic agents to an umpteenth rate increase. Several factors can play a role in this respect: negative animal spirits, debt levels and their characteristics, asset valuations, bank lending, capital markets. This calls for increased gradualism and, at some point, taking a pause whilst insisting that this doesn’t represent an end to the tightening cycle.