eco TV
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


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.

View more videos Eco TV

On the Same Theme

Monetary easing at full employment: how effective? 7/12/2019
Fed Chairman Powell, in his address to Congress this week, has confirmed that easing is coming. In June, ECB President Draghi provided similar hints. This comes on the back of growing concerns regarding global growth and ultimately facing too low a level of inflation. Risks may be mounting, but, on the other hand, the unemployment rate is close to the natural rate. There are reasons to assume that monetary easing under full employment would be less effective than when the economy is marred in recession. Monetary easing could also raise concerns about financial stability, which, if unaddressed, could weigh on the ability of monetary policy to successfully boost inflation.
Growth concerns on the rise 7/10/2019
A sigh of relief followed the publication of first quarter GDP data. However since, growth concerns have picked up again on the back of a collection of new economic data but also — and perhaps more importantly — due to continued high uncertainty. The latter stems from concerns over the extent of the slowdown and its consequences in terms of economic risks. It also emanates from escalating tensions between the US and China over trade. The effects of this confrontation already show up in the Chinese data while in the US, mounting anecdotal evidence also point to its detrimental impact on business and the agricultural sector. The Federal Reserve has turned a corner and indicated that rate cuts are coming, much to the joy of the equity market. The ECB has also changed its message: with risks tilted to the downside and inflation going nowhere, it considers more easing is necessary.
Exogenous versus endogenous uncertainty and monetary policy 7/5/2019
 A high level of uncertainty can act as a drag on growth. Whether monetary easing will succeed in boosting growth will depend on the nature of uncertainty. Endogenous uncertainty follows from the normal development of the business cycle and rate cuts should succeed in reducing this uncertainty by boosting confidence of economic agents. Exogenous uncertainty is not driven by the business cycle but is triggered by other factors, such as, in the current environment, ongoing trade disputes. In this case, monetary policy effectiveness suffers and, despite rate cuts, the growth slowdown should continue until its root cause (exogenous uncertainty) is addressed.  
Uncertainty: persistently high 7/5/2019
High levels of uncertainty can have a profound impact on economic activity and financial markets. Our Pulse presents different metrics.
Climate change puts balance sheets at risk 6/28/2019
Climate change puts at risk the balance sheets of numerous actors, such as households, companies and the public sector. The first episode of this series of podcasts sets the general framework, William De Vijlder is going to remind us what a balance sheet is and how climate change can impact it. The second episode will focus on households and the third one on companies. In the fourth and last episode William De Vijlder will explain how climate change is impacting the balance sheet of the public sector.
Climate change: household balance sheets 6/28/2019
How does climate change impact the household balance sheet? Households’ assets and liabilities may be subject to climatic hazards. In many countries, this lesson was learned the hard way. That is why households should be aware of the environmental impact of the companies they choose to invest in or work for. In this second podcast’s episode, William De Vijlder emphasizes the particular importance of climate change in household finances.
Climate change and the governance of non-financial companies 6/28/2019
Climate change can impact business in many ways. We all know the effects of natural disasters, for example. But today, the views of users and consumers should be taken into account. So, climate change can not only affect infrastructure, production or sales but as well the very value of a company. Indeed, its valuation could drop because of climate risk exposure. That is why, William De Vijlder, in this third episode, recommends companies to include climate risk into their balance sheet management.
Climate change: public sector 6/28/2019
This last episode focuses on the impact of climate risk on the public sector balance sheet. How will states address the challenge of climate change? How will they manage the climate debt? Will they be able to implement the appropriate investment policies in a context of pressure on tax revenues? William De Vijlder exposes in this podcast the tremendous challenge faced by the public sector and the answers it is starting to provide.
Central banks: synchronised swimming against the tide 6/21/2019
ECB President Mario Draghi, speaking at Sintra, has raised expectations of renewed policy easing.The message from the FOMC meeting is that rate cuts are coming. This policy synchronisation reflects shared issues (inflation too low versus target) and shared concerns, the major being rising uncertainty. Should this continue, the effectiveness of monetary accomodation will suffer.

ABOUT US Three teams of economists (OECD countries research, emerging economies and country risk, banking economics) make up BNP Paribas Economic Research Department.
This website presents their analyses.
The website contains 2179 articles and 574 videos