eco TV
EcoTV - January 2019 1/8/2019

TRANSCRIPT // EcoTV - January 2019 : January 2019

Hello and welcome to this first edition of EcoTV in 2019. On behalf of all our Economic Research teams, we wish you a very happy new year.

We’ll start by focusing on Latin America. Some new presidents have started their terms of office: Jair Bolsonaro in Brazil and Andrés Manuel López Obrador in Mexico. There are also elections coming up in Argentina. François Faure will provide an update on the region’s economic environment.

In the Chart of the Month, chief economist William De Vijlder will tell us about early signs of recession in the USA. We should be keeping an eye on the ISM manufacturing index and monthly job creation figures.

To end with, Louis Boisset will talk to us about the Eurozone economy, on which we remain cautious. See you again at the end of the programme.





François Doux: Focus on Latin America There is a new political landscape in several countries following last year’s presidential elections in Mexico and Brazil. This year, it’s Argentina’s turn.

François Faure, hello.


François Faure: Hello.


François Doux: First question: what is the economic situation in Latin America in early 2019?


François Faure: It’s relatively difficult, because like many emerging countries, the region is suffering from the strong dollar, falling commodity prices – particularly metals and oil – but also from the current and future tightening of US monetary policy. As regards Latin America in particular, we are seeing a downturn that started around three months ago and which is being confirmed in the surveys, except perhaps in Brazil where things are a little better.


François Doux: As regards international trade, how will these countries be affected?


François Faure: They will be affected mainly by the Chinese economic situation. China is a major market for many countries in the region: 20% of exports for Peru and Brazil export and in Chile the figure is 25%.


François Doux: So how will these countries be affected by the tougher international trade terms imposed by the USA?


François Faure: In two ways. Firstly, Mexico is a special case: its new agreement with the USA and Canada should be ratified by the countries’ parliaments. It’s still very hard to say whether this will hurt Mexico and in particular its auto sector, because the agreement is expected to cause a redistribution of production sites, which could depress Mexican production.

On the other hand, there are China’s retaliatory measures against US agricultural products which, if they are maintained, could benefit Brazilian and Argentine grain producers.


François Doux: What about the tightening in external financial conditions?


François Faure: Conditions have become much tighter, mainly for Argentina. For the region’s other countries, it hasn’t been as bad. However, the IMF’s simulations in October 2018 showed that the impact on growth could be significant for all countries. Between 0.5 and 1 point of GDP depending on the country in the next year.


François Doux: The external environment, as we know, is less supportive. So will the two incoming presidents, Messrs Bolsonaro in Brazil and Obrador in Mexico, have any room for manoeuvre in terms of monetary and fiscal policy to counteract it?


François Faure: Overall, the answer is no. I think that monetary and fiscal policies will remain, if not tight then at least very cautious, to maintain broad macroeconomic balances. However, we can nuance that in terms of monetary policy in Brazil and fiscal policy in Mexico. In Brazil, monetary policy has been loosened because of the fall in inflation. And if President Bolsonaro manages to push through his famous pension reform, monetary policy could be loosened a little more.


François Doux: In Mexico, President Obrador has detailed around 100 measures. Have they clarified the fiscal policy situation at all?


François Faure: Fiscal policy is likely to be a little more expansionary because there are lots of measures to support the incomes of Mexico’s poorest people. Retired people will see a sharp rise in their pensions. An increase in the minimum wage is also planned and grants will be distributed more widely to students. This will automatically boost demand and therefore growth in the short term. In the medium term, the reform of the energy sector is likely to be the most important one, because oil production has fallen sharply in the last few years. We are expecting a pretty large investment plan, which would increase the growth potential of not just for the energy sector but for the whole economy.


François Doux: So we should keep an eye on the Mexican economy in 2019 but also the Brazilian economy and, of course the elections in Argentina.

François Faure, thank you. In a moment, we’ll talk about the USA in Chart of the Month with William De Vijlder.





François Doux: In Chart of the Month, we’re going to talk about the risk of recession in one country in particular: the USA.

William De Vijlder, hello.


William De Vijlder: Hello.


François Doux: How do we traditionally measure the risk of the USA falling into recession?


William De Vijlder: The preferred indicator for economists is the unemployment rate, and specifically its year-on-year change. When that change becomes positive, there has typically been a recession in the past.


François Doux: The problem is that the unemployment rate signals a recession, whereas your job is to forecast it.


William De Vijlder: Yes, our job is to anticipate developments, so we look at other indicators, hoping to find a signal that shows an increasing probability of recession.


François Doux: What are these indicators?


William De Vijlder: I’ve chosen two very popular ones.

The first, shown by the red line, is an indicator of sentiment in the US manufacturing sector. We have taken all recessions since 1960 and, for each month of the 24 months preceding the start of the recession, we calculated the average reading for this manufacturing sector indicator. That gives us this average, the red line. We can see a sort of plateau effect. The indicator remains fairly high until around 10 months before the economy enters recession. After that, it falls very quickly.


François Doux: And when it falls below 50, the economy is contracting and we are in a recession. Ten months before, there are some words and a blue line. What does that line represent?


William De Vijlder: The blue line shows job creations, and we perform the same exercise. For each month, we calculate the average number of jobs created 24 months before the start of a recession, 23 months before etc. We see a very clear trend, which makes it easier to understand. What’s fascinating is that between 24 and 14 months before a recession starts, the figures are fairly high, whereas here they are gradually falling. The important point to note is that, even one or two months before the economy falls into recession, job creations are still running at between 100,000 and 150,000.


François Doux: 100,000 to 150,000 jobs being created every month, and the economy can fall into recession just after that.


William De Vijlder: Yes, that’s right.


François Doux: Last question: what’s the situation today? We have non-farm payroll numbers for November 2018 at 155,000 and an ISM manufacturing index of 59.3. So we’re at the upper end of the range, but your conclusion is that we should remain cautious?


William De Vijlder: Absolutely, because optimists will look at one indicator while the others will focus more on job creation numbers. What’s clear to me is that job creations, which is my preferred indicator, will allow us to monitor closely the behaviour of the US economy in 2019.


François Doux: We’ll follow it throughout 2019. William De Vijlder, thank you. In a moment, we’ll talk about the eurozone economy in Three Questions with Louis Boisset.




François Doux: Three questions on the eurozone economic situation.

Louis Boisset, hello.


Louis Boisset: Hello François.


François Doux: A key and obvious trend, the Eurozone economy is slowing, with growth of barely 0.2% in the third quarter of 2018. Economic indicators are also falling. What are the reasons for that?


Louis Boisset: Firstly, we should bear in mind that the slowdown was partly expected after strong economic performance in 2017. However, the extent of the slowdown has been surprising. There are several possible explanations for this poor performance. Firstly, increasing uncertainty has been a global trend, in both political and trade terms. But there are also more specific reasons, such as difficulties in the German auto sector in the third quarter, which dragged down growth. German Q3 growth was negative for the first time since early 2015. We saw slightly negative growth in Italy as well.


François Doux: For my second question, can you tell us about more secular indicators, Louis?


Louis Boisset: Yes, there are several of them, and increased trade tensions in particular are among structural risks, especially for countries like Germany that depend on their export sector. We can moreover note that foreign trade has weighed on Eurozone growth since the start of 2018, whereas it significantly supported it in 2017. Taking a wider view, we should keep in mind that escalation of trade tensions could weigh on economic agents – consumers and businesses – confidence and that would eventually cause a sustained drop in aggregate domestic demand, i.e. consumer spending and investment.


François Doux: Aren’t there some indicators that can give us a little optimism?


Louis Boisset: Absolutely. Firstly, the labour market is improving. The unemployment rate has been falling steadily and is now at its lowest level for 10 years. The employment rate has seen a sustained rise and is now above its pre-crisis level, while Eurozone wage growth has been accelerating since mid-2016. That acceleration in wages should support consumer spending, which would in turn be beneficial for jobs.


François Doux: My third and final question: what are your macroeconomic forecasts for 2019-2020?


Louis Boisset: We expect the slowdown to continue, with economic growth of 1.4% in 2019 and 1.2% in 2020. We expect inflation at 1.8% in 2019, and to fall slightly to 1.5% in 2020. However, core inflation should strengthen, because of faster wage growth.


François Doux: Louis Boisset, thank you. See you again in February for the next edition of EcoTV.

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