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What explains the downward revisions to growth? 2/7/2019

The recent weakening of economic data has led to a downward revision in growth forecasts of the IMF and in the ECB Survey of Professional Forecasters. We have lowered our eurozone forecasts for 2019 as well.

TRANSCRIPT // What explains the downward revisions to growth? : February 2019

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François Doux

Economic forecasters have the blues. Their growth forecasts are increasingly pessimistic for the months ahead. ECB economists are looking for eurozone growth only 1.5% in 2019, down from 1.8% previously.

William De Vijlder, hello.

William De Vijlder

Hello François.

François Doux

Do you share their pessimism? A little more so than before?

William De Vijlder

We are less optimistic, and less confident. We have lowered our eurozone growth estimate to 1.0% this year, from 1.4%.

François Doux

You are not the only ones. In addition to the ECB survey, the IMF is also more pessimistic, as we can see in these figures. The IMF has lowered its growth forecast. It lowered its global growth outlook by 0.2% to 3.5%, but held its US forecast unchanged at 2.5%. As to the eurozone, the IMF is more optimistic than you are, with a growth forecast of 1.6%. How do you explain this excessive pessimism?

William De Vijlder

I don’t know if you can call it excessive pessimism. Let’s say that we are being much more cautious, and that we are associating several different factors.

Looking back at last year’s forecasts, or the ones just six months ago, we can see they were a bit too optimistic. I think we all got carried away by the robust growth figures and very high confidence indicators.

What seems even more important, however, is that the world we live in today has changed tremendously. A year ago, for example, money market funds were focused on the risk of higher US interest rates and a rebound in inflation.

Today, everyone is worried about US-China trade negotiations, and the outcome of Brexit. In the end, the world has changed a lot.

François Doux

Risks have evolved. There are even a few more risks now. Doesn’t this make forecasting harder? Isn’t there less visibility?

William De Vijlder

Visibility is low. But this is also due to some temporary factors. Take for example the events that have swept France in recent weeks. Grasping the impact of these events, which a priori should be only temporary, is a real challenge. They might have a more lasting impact on growth momentum. In our opinion, they will only have a temporary impact however. In Germany, several factors are also playing a very temporary role, notably the application of new anti-pollution standards, which has hit the automobile sector.

These factors effectively create a more opaque environment that is hard to analyse. Reduced visibility also influences household and corporate behaviour. Household confidence has eroded. I think this can be attributed to lower visibility. When companies have less visibility, they become less confident and tend to scale back investment.

François Doux

Greater uncertainty can also be seen in the financial markets. In the eurozone, economic statistics were not as robust as expected, and as a result the markets reacted even more strongly. But don’t you see any signs of hope, William De Vijlder?

William De Vijlder

Yes, of course. Psychologically, we risk switching from excessive optimism to excessive pessimism. This is a very well-known phenomenon.

A second, even more important point, is that there is a good chance that the US-China trade talks will eventually result in an agreement. Brexit is a different matter: the outcome is totally opaque. Yet there is still talk about the possibility of avoiding a no-deal Brexit. That at least should boost morale.

A third, very important factor concerns China. It has announced a series of fiscal measures which should begin to pay off as of the second quarter.

Under the combined impact of these three factors, confidence indicators should at least level off. As a result, growth prospects could be a little more optimistic for the rest of the year.

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