eco TV

EcoTV - November 2019

11/12/2019

TRANSCRIPT // EcoTV - November 2019 : November 2019

Hello everyone, and welcome to this latest edition of ECOTV, the video magazine from BNP Paribas economists.

In this November 2019 edition, the changing of the guard at the European Central Bank. William De Vijlder, our Chief Economist, reviews Mr Draghi’s time in charge and discusses the challenges facing the Lagarde era.

In the Chart of the Month we’ll be talking pensions with Raymond Van Der Putten. We will compare countries on the basis of their pensions systems and levels of poverty.

To close, Three Questions on China with Christine Peltier. Growth, there, is slowing because of the trade war with the USA, but domestic demand is also softening. We’ll catch up at the end of the programme.

 

FOCUS

François Doux

William De Vijlder, hello.

William De Vijlder

Hello.

François Doux

You are the Chief Economist at BNP Paribas. You have known all the Presidents of the European Central Bank. Looking at Mario Draghi, how would you view his term of office?

William De Vijlder

On balance mainly positive, but not 100% positive. So the answer is nuanced, as is often the case. What is most striking when we look at Mr Draghi’s time at the head of the ECB is the creativity that he showed, and the creativity that the Governing Council showed, most notably in the interpretation of their mandate.

When I was preparing for this interview, I looked back at his first speech as President, when his interpretation was fairly strict. The focus was essentially on inflation, and what we have seen gradually emerge is the growing awareness that there are, of course, many factors that can contribute to inflation or contribute to the risk of deflation.

François Doux

Over and above the creativity of interpretation, there are also actions and the use of monetary policy instruments.

William De Vijlder

Exactly. We have gradually seen an extension of the range of instruments used. Once upon a time, monetary policy meant interest rates. But then TLTRO was added, the famous Forward Guidance was added, giving indications of monetary policy intentions over a longer or shorter period. And obviously we have also seen quantitative easing, and of course negative interest rates.

François Doux

Negative interest rates have in effect created a rather new and rather complicated situation. We often talk about the efforts made in Frankfurt and by the Governors of the European Central Bank; what is your point of view?

William De Vijlder

I think that as far as their efforts are concerned they are beyond criticism. Admittedly, some might be tempted to say that they have tried too hard to increase inflation. This is an on-going debate between economists, but in any event, the effort has been substantial and assiduous to encourage a resumption of growth and then hope that inflation follows suit.

François Doux

Let’s cut to the chase, William de Vijlder. The results: the sovereign debt crisis, inflation, job creation, where are we with all this?

William De Vijlder

This, effectively, is where the report card is a little more mixed. The control that the ECB exercised in the sovereign debt crisis was clearly a success. Everyone thinks back to that famous speech in London, which has become a sort of shorthand for all that followed, because it was so very important.

In other words, without the ECB, without Mario Draghi, the world would be a pretty different place today. The other extremely important factor has been the highly accommodating monetary policy that has contributed to very significant job creation. But I would say that perhaps the tragedy of the ECB is that inflation has yet to recover. Why do I call this a tragedy? Because everything suggested that they could pull this off: economic activity was growing, wage growth was accelerating and so we expected inflation to follow on. And then there were shocks coming a bit from all directions, which stopped the inflationary momentum in its tracks.

François Doux

Let’s also move on to the challenges facing Christine Lagarde. Monetary policy works alongside fiscal policy. So in terms of encouraging European governments to play their part, how do you see Mr Draghi’s performance and Ms Lagarde’s challenges?

William De Vijlder

Well, there is still a lot of work to be done. I think that this has been a source of frustration for Mario Draghi too. Despite arguing, at every press conference after every Governing Council meeting, despite his insistence on the need for structural reform and so on.

I looked back at his very first speech, when there were several paragraphs on this topic. So we are forced to conclude that not every country has done what they have needed to do, so the scorecard is mixed.

The other important point, which he raised explicitly at the 12 September meeting, is that fiscal policy now has a very important role to play in completing the picture for the European cycle, completing the work of monetary policy. And so, here in particular, with this need to have a central fiscal capacity, as he repeated at his last press conference, if there is one thing I hope for it is that Christine Lagarde will really stress this central structure to win governments over to the idea. Clearly it is up to governments to take the decision, so she needs to convince governments that this is what we need, the final piece that completes the impressive edifice that is economic and monetary union.

François Doux

I would just refer people listening to or watching this podcast to the fact that we have had negative interest rates. We can see the scale of the fiscal policy and structural challenges that lie ahead. To close, William De Vijlder, the challenges for Christine Lagarde, over and above this fiscal policy question, what might they be?

William De Vijlder

I think another area relates to the ECB’s communications policy in terms of objectives and in terms of instruments. Is this not a good time to review this area? This is something that we have to recognise; Mario Draghi did not want to do, or didn’t have the time, I don’t know, but it is an analysis that the Federal Reserve, for example, is now carrying out. I think it would be good if the ECB conducted the same exercise.

François Doux

But I think that the two banks talk to each other across the Atlantic.

William De Vijlder

Oh, yes.


THE CHART OF THE MONTH

François Doux

In this Chart of the Month, we will be talking pensions and the income profile of the over-65s.

Raymond Van Der Putten, hello.

Raymond Van Der Putten

Hello.

François Doux

So, what are the different types of income for over-65s that you have shown on this chart?

Raymond Van Der Putten

For seniors, the main source of income is the state pension, this is the blue line. After that we have occupational pensions in green, and then income from investments in orange, and work in red.

François Doux

This concerns in particular the self-employed.
So how have you ranked countries from left to right on this chart?

Raymond Van Der Putten

They are ranked by importance of the public pension system. On the left we have countries where the public system is the only pension system. This is particularly the case in the eurozone. As we move to the right, the public pension is more a basic pension topped up by additional income from occupational pensions. This is the case in the English-speaking countries, and also in the Netherlands.

François Doux

These two systems are facing long-term viability issues, why?

Raymond Van Der Putten

At the moment, occupational pensions are suffering from rather low interest rates. These have made it very difficult for them to generate sufficient returns to cover future income and they have had to increase contributions as a result.

On the left-hand side, the problems will play out over the next decade or so. At the moment there are three people in the working–age population for every pensioner, but in ten years this will drop to two people. If we want to keep pensions at the same level, contributions will have to rise by 50%, which is not realistic.

François Doux

So what are the solutions to these problems?

Raymond Van Der Putten

Well, there are not many solutions. If we want to keep contributions at the same level and benefits also, we have to raise the retirement age. Some countries – the Netherlands, Germany, Italy – have already started to do that.

France wants to keep the minimum retirement age unchanged, but will be introducing incentives for people to work longer. Japan is an interesting example. There are already only two workers per pensioner, but pension spending is around 15% of GDP, similar to the level in France.

What is Japan’s secret? Pensions are very low. This creates an incentive for older people in Japan to carry on working after retirement age. On average, 40% of pensioners’ income there comes from employment, compared to 5% in France.

François Doux

So, to conclude, Raymond Van Der Putten, the right-hand scale shows the risk of poverty for the over-65s. We can see that for France we are at the upper end, so the risk is low.

Whilst in Japan, which you have just been discussing, the risk is high.

Raymond Van Der Putten

Yes. And that is the danger. With the pension reforms, people start to work longer. In this case, the red column gets much bigger. And we can see in this chart, where the red column is tall, the risk of poverty is also high.

François Doux

Thank you Raymond Van Der Putten for this update on pensions. Coming up, Three Questions on China with Christine Peltier.
 

3 QUESTIONS

François Doux

Now three questions about China, where growth is slowing.

Christine Peltier, hello.

Christine Peltier

Hello.

François Doux

China saw growth of 6.6% in 2018. In the third quarter of 2019 this dropped to just 6% year-on-year. First question, what is holding back Chinese growth?

Christine Peltier

First, the export sector has been hard hit by the increase in US tariffs and the slowdown in global demand. Over the first nine months of 2019, total exports were slightly lower than in the same period of 2018. In particular, China’s exports to the US fell by 11%. So China has to look for other sources of growth. The problem is that growth in investment and growth in private consumption have also been slowing down. The weakening of consumer demand has been particularly visible in the automotive sector, but the slowdown has also affected retail sales, sales of durable goods and online sales of goods and services.

François Doux

Second question: what are the reasons for this slowdown in growth in private consumption in China?

Christine Peltier

A series of factors explain the slowdown in private consumption growth. First, consumer price inflation has accelerated since the beginning of the year, driven by rising food prices, and particularly higher pork prices.

Then, the difficulties of the manufacturing sector have had negative effects on Chinese confidence and the labour market. The slowdown in real estate market transaction volumes has also probably affected Chinese consumers’ purchases of durable goods.

Another factor has been the slower pace of growth in consumer credit, following the authorities’ tightening of the rules on such lending. In particular, the authorities have tightened rules governing peer-to-peer lending platforms. Moreover, the burden of servicing household debt has probably started to weigh on spending, as household debt has increased sharply in recent years, reaching 56% of GDP.

François Doux

Are there also structural factors perhaps?

Christine Peltier

Yes, there are other persistent factors in China. First, real growth in the average per capita disposable income continues to slow. Secondly, China has considerable levels of income inequality, which hits private consumption. Lastly, Chinese households still save 36% of disposable income, which is a very high rate.

François Doux

Third and last question. What is the government doing to try to jump-start domestic demand?

Christine Peltier

As far as monetary and credit policy is concerned, the relaxation since the spring of 2018 has been prudent. Growth in corporate credit has picked up only slightly, whilst growth in consumer credit has slowed.

The authorities remain very cautious, and are tightly constrained by the debt excess of the Chinese economy and high levels of credit risk. The Chinese authorities have sought both to support economic growth, or at the very least limit its slowdown, and to pursue the process of cleaning up the financial sector, reducing debt of the most vulnerable companies and promoting a healthier expansion of the real estate market.

In terms of fiscal policy, there is a bit more room to manoeuvre. Investment in public infrastructure projects is starting to pick up, and a series of tax incentives has been introduced since last year. These tax breaks are aimed at helping corporates and stimulating private consumption. Their positive effects should start to feed through before the end of this year.

François Doux

Thank you, Christine Peltier, for this update on China.

We look forward to seeing you again in December, for the last EcoTV of this year.

View more videos Eco TV

On the Same Theme

First signs of a timid turnaround 5/29/2020
Without a doubt, the eurozone GDP will contract much more sharply in Q2 than in Q1 (-3.8% on a quarterly basis, q/q). Yet this deterioration generally seems to have been halted. After a timid upturn in the Purchasing Managers Index (PMI) in May, the eurozone Economic Sentiment Index (ESI) also seems to have bottomed out. After dropping to an all-time low of 64.9 in April 2020, the ESI picked up slightly to 67.5 in May [...]
At the trough? 5/27/2020
Households’ confidence will be a key determinant in the current recovery. The deterioration – felt or anticipated – in the labour market has weighed on consumers’ optimism: the European Commission (EC) unemployment expectations index dropped to a 11-year low in April (63.0). However, the Purchasing Managers indices (PMI) indicate that the economic downturn has started to ease in May. This could filter through into a pick-up of households’ confidence. Indeed, the chart below shows that the EC unemployment expectations index follows closely the employment PMI indicator. The latter improved in May, although staying at a very low level. The gradual reopening of shops, restaurants, and some cultural sites could also support consumers’ confidence in the coming weeks.
Four countries, four ways to recover 5/20/2020
The shape of the post-crisis recovery will depend on the characteristics of each economy, the fiscal response and the level of integration in global value chains. Even before the COVID-19 crisis, some eurozone economies were more vulnerable than others. High levels of debt or unemployment could limit the strength of the recovery. At a domestic level, the sectoral structure, the pattern of private consumption and the labour market situation will be crucial. A high dependency on tourism, a sector durably impacted by the crisis, could hold back the recovery. At the external level, a slow recovery in global trade would hit the most open economies. Moreover, the distortions in global value chains during this crisis could weaken the most highly-integrated economies over a longer period.
Recession in the eurozone: will this time be different? 5/19/2020
Key factors of uncertainty during a recession are its length and the pace of recovery. The 2008 recession lasted long and the growth pick-up was very gradual. The current recession is far deeper but should also be more short-lived because its origin is a pandemic so when the lockdown is lifted activity picks up mechanically. According to the European Commission, the recovery should also be swifter than in 2009.
The many faces of proportionality in economic policy 5/7/2020
Following the judgment of the German Constitutional Court on 5 May, the ECB Governing Council needs to demonstrate that the monetary policy objectives of its PSPP are not disproportionate to the economic and fiscal policy effects resulting from the programme. In most cases, monetary, economic and fiscal policies are mutually reinforcing. When assessing whether monetary policy is appropriate, one should take into account the stance of economic and fiscal policy. The necessity to have adequate transmission to all jurisdictions as well as the likelihood and extent of tail risks due to insufficient policy action also play a role in the assessment.
The drop in Eurozone GDP: the worst is yet to come 5/6/2020
Eurozone DP shrank by -3.8% in the Q1 2020, on a quarterly basis. The economic contraction in Q2 2020 is set to be much more pronounced. The consequences of the current crisis have not been yet fully identified and given the risk of financial fragmentation, the action of the ECB should remain flexible.
Lending trends in the euro zone: The coronavirus pandemic has led to an unprecedented rise in demand for credit from companies, but has hit demand from households 4/30/2020
Lending momentum in the euro zone recovered strongly in March 2020, with an increase of 1.6% from a 0.4% fall in February. Against a background of negative GDP growth in the first quarter (-3.3% Q/Q-4 from +1.0% Q/Q-4 the fourth quarter of 2019), conditions in March were severely affected by the lockdown measures introduced by national governments over the month [...]
A disinflationary bias in the short and the medium term? 4/27/2020
The Covid-19 crisis will result in a sharp contraction of eurozone GDP. However, its effect on inflation is still unclear. The impact could be disinflationary over the short term, although no consensus has emerged as to the likely medium term trend. In March, total inflation in the eurozone fell significantly, also reflecting the effect of lower energy prices. The destruction of a portion of the productive capacity could constrain supply in the medium term, whilst public policies will support demand, thus encouraging an acceleration in prices. Conversely, a lack of demand relative to potential supply could maintain a disinflationary bias in the eurozone.
A new, massive shock 4/8/2020
The Covid-19 pandemic has triggered a recession in the Eurozone that looks likely to be deep but short-lived. After a difficult year and a half on the economic front, the Eurozone was showing some resilience and was even beginning to show signs of stabilisation. The current shock – in demand, supply and uncertainty simultaneously – has completely changed the outlook. The health measures taken- which have been necessary to protect the population from the virus- have created the conditions for a recession. Monetary and fiscal policymakers have reacted swiftly and, so far, proportionately. However, the profile of the economic recovery remains unclear and will be crucial in assessing the damage ultimately caused by the pandemic.
The collapse of economic activity has been confirmed 4/3/2020
Looking at the economic data for the euro area that has emerged recently, the conclusion is clear: we are seeing an unprecedented economic contraction in the service sector. The average eurozone service sector PMI plummeted in Q1 2020, well below its long-term average...

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 2422 articles and 621 videos