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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

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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.

 

 

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