eco TV

EcoTV - June 2019


TRANSCRIPT // EcoTV - June 2019 : June 2019

Hello and welcome to the June 2019 edition of EcoTV, the video magazine of BNP Paribas economists.

We will start off this edition by looking at the global cyclical environment as we approach the midpoint of the year. William De Vijlder, BNP Paribas’ chief economist, will talk about world economic fundamentals, which are rather strong. Uncertainty persists, however, notably in terms of geopolitics and international trade. William will give us some guidelines for understanding the months ahead, notably in terms of monetary policy.

The Chart of the Month will focus on a buoyant European country – Poland – with 5.1% growth in 2018, the strongest performance since 2007. But Sylvain Bellefontaine will also talk about the Polish model, and signs that it might be losing its shine.

We will conclude with three Questions on Brexit with Jean-Luc Proutat, who will examine the chances that the UK will (or won’t) leave the European Union by 31 October 2019.

Enjoy the show.


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.


Chart of the Month

François Doux: The Polish economy is going very strong, with 2018 growth of 5.1%, the best performance since 2007.Sylvain Bellefontaine, hello.

Sylvain Bellefontaine: Hello François.

François Doux: Looking at 2019, what is the trend?

Sylvain Bellefontaine: We are trending towards a slowdown, although the first quarter was rather strong, with preliminary growth estimates beating expectations at 4.6% year-on-year.

François Doux: Does this mean desynchronization between a buoyant Polish economy and a somewhat more sluggish eurozone?

Sylvain Bellefontaine: Yes, based on what we have seen in the first quarter of the year, combined with last year’s performance. Desynchronization is the right word, since domestic demand in Poland is still very robust.

Demand is driven by consumption, and by both private and public investment, as part of the stimulus package launched in February, with the approach of the European elections, and legislative elections in October.

François Doux: Let’s look at a few figures on the chart. The unemployment rate is relatively low. What about inflation and growth?

Sylvain Bellefontaine: Growth was 5.1% last year. We foresee a slowdown to about 4% this year. Our biggest concern, however, is Poland’s medium-term prospects. They seem to be calling into question Poland’s economic model, which is based on competitiveness and low labour costs.

François Doux: How is this model being called into question?

Sylvain Bellefontaine: The big problem is the job market and a shortage of labour. Poland is operating at full employment, which has been offset so far by an inflow of non-resident workers, notably Ukrainians. Wage acceleration could also be a problem in the future given the sluggishness of productivity gains. Under this environment, there is also the risk of creating a middle income trap.

François Doux: What is the solution? More innovation? Raising skills?

Sylvain Bellefontaine: Yes, training is one solution. The keys to success are always the same, but that’s what we must strive towards: innovation, research & development, and the automation of certain production processes, to generate enough productivity gains to offset the labour shortage. From a more fundamental perspective, there is also a demographic problem. The country has been in a demographic decline, although it has been relatively slow over the past two decades. This decline must be checked to boost the country’s macroeconomic prospects in the medium and long term.

François Doux: In any case, Polish growth is still solid. Thank you, Sylvain Bellefontaine, for presenting the Chart of the Month. We will be back in a moment for Three Questions on Brexit, with Jean-Luc Proutat.



François Doux: Will 2019 be the year of Brexit? The deadline keeps changing, from 31 March to 12 April and now 31 October. Jean-Luc Proutat, hello.

Jean-Luc Proutat: Hello François.

François Doux: A priori, 31 October is the new deadline by which the UK must leave the European Union. My first question: the situation seems to be deadlocked. Why?

Jean-Luc Proutat: It’s an inextricable situation. Over the course of 45 years of communal living, the UK and the European Union have built up very close links, which go far beyond a simple free trade agreement.

Take Airbus, for example. The UK is a key part of the supply chain, furnishing the wings, electrical circuits, engines, etc. Directly or through British suppliers, Airbus sustains a hundred thousand jobs in the UK. Once the UK is outside of the EU, the situation risks becoming much more complicated.

François Doux: Why?

Jean-Luc Proutat: Simply because the European Union pools together all of its legal, technical and regulatory standards, which makes trade extremely secure. The EU also guarantees the free circulation of labour, which is very important for an integrated sector such as aeronautics. There are numerous other examples in the mechanical engineering industry, agro-food, etc.

The International Monetary Fund has described Brexit as “self-mutilation”. So we can understand why the UK parliament keeps hesitating when it comes time to sever ties.

François Doux: This brings us to my second question: what are the political leaders going to do? This edition was recorded before we had the results of the European elections, but we have seen the polls.

Could this new situation change things?

Jean-Luc Proutat: I’m afraid not. According to the polls, the country is divided into three parts. About a third of voters support a hard Brexit. On the opposite side, a third of voters vote for pro-EU parties like the Liberal Democrats, the Greens or the SNP, for example. Between the two, the final third hesitates a bit, in a mirror image of the moderate conservatives and Labour leaders.

Given this political landscape, it will be very difficult to make the least decision. We also know that Prime Minister Theresa May is preparing to resign. She must be replaced by another member of the Conservative party. Early elections cannot be ruled out though, nor another Brexit referendum. All of this will keep UK politicians busy in the weeks and months ahead. Reaching a withdrawal agreement is likely to become secondary. Consequently, come 31 October, we are likely to be in more or less the same position as we are today.

François Doux: My third and last question: with this interminable uncertainty, how is the UK economy faring?

Jean-Luc Proutat: Growth is undoubtedly slowing, although activity rebounded slightly in first quarter 2019, as the British began stockpiling intensively in preparation for Brexit. But the underlying trends are not as strong. Brexit seems to be acting a bit like a slow poison. For example, foreign direct investment net flows are drying up and are near zero. Immigration from the EU have slowed sharply too. The housing market has landed. There is little reason to believe that these trends will reverse themselves in the months and quarters ahead.

François Doux: More subjects to monitor together. Jean-Luc Proutat, thank you.Tune in again next month for a new edition of EcoTV.

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