eco TV

Outlook for the second semester: the tug of war between good fundamentals and rising uncertainties

6/11/2019

World economic fundamentals are rather strong. However uncertainty persists, notably in terms of geopolitics and international trade.

TRANSCRIPT // Outlook for the second semester: the tug of war between good fundamentals and rising uncertainties : June 2019

FOCUS

François Doux: Halfway through the year 2019, let’s get an update on the global economic cycle from our chief economist. Hello William De Vijlder

William De Vijlder: Hello François.

François Doux: William, today we’ll talk about fundamentals, headwinds and the central banks’ “eternal” monetary support.Let’s start with fundamentals. We have the figures for first-quarter 2019. What do they tell us.

William De Vijlder: The overall performance is rather reassuring. Growth beat expectations not only in the US, but also in China and Japan. The eurozone also outperformed, so everyone is relieved.

François Doux: That is reassuring after a somewhat turbulent year-end 2018.

William De Vijlder: Yes, the financial market volatility was extremely disconcerting. So these growth figures are reassuring. Yet we must also nuance our message somewhat: I don’t want to give the impression that I’m overly optimistic either.

François Doux: Why, are you seeing some cracks in these fundamentals?

William De Vijlder: That’s right. Fundamentals are still upbeat, but they are not quite as strong as they were 12 months ago. Which fundamentals? The job market, household income, corporate earnings growth and interest rates. In both the United States and Europe, they are still rather strong, but less so than in the year-earlier period.

François Doux: Looking towards the future, we are obviously confronted with uncertainty. That’s one word that comes up repeatedly in our interviews, William. Halfway through the year 2019, is uncertainty currently higher or lower?

William De Vijlder: Uncertainty is clearly playing a dominant role. In a sense, it is overshadowing the quality of fundamentals. It is important to keep this in mind. At the beginning of the year, for example, we had hoped that by now there would be less uncertainty over key economic areas, but the situation is still totally opaque.

François Doux: There is the geopolitical situation and trade tensions. What is your point of view?

William De Vijlder: Geopolitical tensions are very tight. Trade tensions, too. We were hoping the US and China could reach a trade agreement by now, but we are still far from it. We were hoping for some clarity over Brexit, too, but for the moment, anything is possible.

François Doux: In the automobile sector, we are still in the dark concerning EU and US relations.

William De Vijlder: This is a major issue. The European Commission has underscored its importance and its multiplier effect not only on the German economy, but also on Germany’s trading partners. The Americans announced that after analysis – was there a threat to safety? – they had not formed a clear-cut opinion on the subject yet, and simply postponed their decision to increase sector tariffs.

François Doux: To conclude, let’s talk about central bank support. It seems to be reflecting both high uncertainty and strong fundamentals.

William De Vijlder: That’s a good way to put it. We have been counting on central bank support for a long time, and this is bound to continue.

François Doux: At the Fed?

William De Vijlder: Yes. The Fed’s message is: “We are patient”. Why? Because inflation is not problematic. The Fed is also afraid of making a mistake, which has almost become an obsession. So it sends out a signal: “we will no longer raise key rates”. And the markets assume that means monetary easing.

François Doux: And in Europe, it’s the absence of inflation that is the big concern?

William De Vijlder: In Europe, that is the ECB’s main focus as it tries to spark higher inflation. The inertia of core inflation is very strong. To counter the headwinds in the EU and the eurozone, the ECB is saying it might reintroduce its famous targeted longer-term refinancing operations or TLTROs, to stimulate lending.

François Doux: We will keep an eye on lending. In conclusion William De Vijlder, what is the key to restoring peace?

William De Vijlder: Confidence. Too much uncertainty has undermined confidence. Say all you want about strong fundamentals, what counts in the end is that confidence is being trampled by uncertainty.

François Doux: Confidence on the part of all economic players.

William De Vijlder: That’s right.

François Doux: Thank you, William. We will talk again very soon about these cyclical issues. We will be back in a moment with our Chart of the Month on Poland, with Sylvain Bellefontaine.

 

 

View more videos Eco TV

On the Same Theme

PMIs confirm the collapse in global economic activity 3/25/2020
The PMI indices published this week give an early insight into the scale of the economic shock from Covid-19. The composite indices for Japan (35.8), Germany (37.2), France (30.2), the UK (37.1) and the US (40.5) all slumped in March. The euro zone composite PMI was the lowest ever recorded at 31.4. The deterioration was particularly marked for the sub-indices relating to employment and orders for goods and services. Figures for April, whilst remaining at historically low levels, are expected to show increasing divergence between the regions. In East Asia, internal demand should start to pick up, as activity starts to normalise in China. Conversely, the epidemic is spreading more rapidly in the US, India and Africa; meanwhile, many European countries remain in lock-down.
The covid-19 epidemic economic consequences: pervasive uncertainty, delayed recovery 3/12/2020
The coronavirus epidemic represents a combination of a demand, a supply and an uncertainty shock. This has knock-on effects on the price of oil and on financial conditions which in turn should end up acting as an additional drag on growth. The huge drop in the price of oil following the absence of an agreement amongst the OPEC+ countries on further production cuts, makes this worse. It hits the producer countries, increases the financial pressure on energy companies, in particular those which are highly indebted, whereas the reaction on the demand side will be muted due to the epidemic and lack of visibility. The timid improvement of business survey data at the end of 2019 has been stopped. Recent data show a very significant deterioration in China, Hong Kong. Elsewhere, the reaction has, on the whole, been limited, but this is not expected to last. The big drop in the price of oil complicates matters further. The Federal Reserve is back in (aggressive) easing mode, the Bank of England has followed and the ECB is expected to ease as well. Several governments have taken various, very targeted policy measures. We should expect more is to follow. When the peak of the epidemic will have been passed and the international propagation halted, the rebuilding of inventories as well as some pent-up demand should support growth. A very accommodative monetary environment should also help. However, the timing of the recovery entirely depends on how he epidemic evolves.
The cryptocurrency economy 3/11/2020
Depending on the source, estimates of the number of ‘cryptocurrencies’ vary between 1,600 and 3,000. These crypto-assets struggle to fulfil the three economic functions of money, and so cannot be considered as such. Although their fairly modest uptake currently limits their economic impact, increased use could create risks in the transmission of monetary policy, money creation and financial stability. Several central banks are looking at the introduction of a ‘central bank digital currency’ (CBDC) in response to these challenges. However, far from being simply a substitute for private cryptocurrencies, these CBDCs would carry specific risks in terms of financial stability, most notably that of a ‘digital bank run’. We believe that their possible introduction, and the associated details, will require meticulous analysis.
The global economy after the coronavirus outbreak 3/10/2020
Macroeconomic surveys conducted since the outbreak of the epidemic have provided relief thus far, but over the next several weeks we should expect the negative impact to become more visible in activity and spending data. Yet, the shock is of a temporary nature and a rebound of activity will follow once the supply chain disruption is abating and demand picks up again. In China, stimulus measures which have already been announced, should help in this respect. The unleashing of pent-up demand and inventory rebuilding should also play a role. The dynamics are rather clear but the timing of course depends on how the epidemic evolves, in China and other countries.
Except for China and Hong Kong, little impact thus far of the coronavirus 3/6/2020
At the start of a new month, the purchasing managers indices are amongst the earliest data providing information on what happened the month before. Following the coronavirus outbreak they were even more eagerly awaited than normal. For the manufacturing sector, the picture is very mixed, with a considerable decline for the world index on the back of huge drops in China and Hong Kong. On the other hand, the index for the eurozone saw another increase, driven by Germany, the Netherlands, Spain and Greece with Italy remaining stable and France weakening. In the US, both the Markit PMI and the ISM index declined. Clearly, except for China and Hong Kong, the data do not yet show the impact of the coronavirus epidemic but it is only a matter of time for this to happen. To some degree this also applies to the services PMIs. For this sector, there were huge declines in China and Hong Kong. Japan weakened considerably, contributing to the decline of the world index. The eurozone was stable. The decline in the US is puzzling considering that the ISM non-manufacturing index improved.
The coronavirus: which role for economic policy? 3/6/2020
The Federal Reserve’s rate cut as well as promise of action by other central banks and finance ministers raise the question of how economic policy can react to the epidemic. The very nature of the shock makes monetary policy at first glance ill-equipped.
The coronavirus: international propagation and tail risks 2/28/2020
The international propagation of the coronavirus forces a rethink of the consequences for the global economy. Coming after the outbreak in China, the marginal impact on the global economy of the spreading of the epidemic should, a priori, be rather limited. Yet, financial markets have reacted very negatively. This jump in risk aversion reflects concern that the economic consequences may have been underestimated thus far as well as increased focus on tail risk. This ‘financial accelerator’ phenomenon may in turn contribute to the worsening of the growth outlook.
Central banks: current objectives and the issues they raise 2/26/2020
In this podcast, we look at central banks policy objectives, which sometimes differ. The ECB’s top priority is to meet its inflation target, whereas the Fed is targeting both inflation and full employment. These objectives raise several questions: how can we measure inflation and full employment? How do central banks set their targets? And what instruments can be used to attain them? We will also see how central banks must deal with a constantly changing economic environment.
Central banks: the trade-off between inflation and financial stability 2/26/2020
How to strike the right balance between inflation and financial stability has been a source of debate for decades. In this second podcast, William De Vijlder shows how the central banks give priority to inflation targets over financial stability. He uses a few examples to illustrate how central banks will opt to hold a steady course even when confronted with the risk of instability, which is often caused by financial market turmoil.
Central banks: Addressing the policy dilemma 2/26/2020
In the third podcast, William De Vijlder shows how a central bank’s persistently accommodating monetary policy to bring inflation in line with the target can have a negative impact over the long term, threatening both growth and financial stability. In case of a crisis, central banks no longer have much room to intervene, since they have used up their manoeuvring room in the pursuit of their inflation target.

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 2362 articles and 601 videos