eco TV

Eco TV – December 2019


TRANSCRIPT // Eco TV – December 2019 : December 2019



François Doux: Turning first to Spain which held parliamentary elections last month. We are joined by Frédérique Cerisier. Hello.


Frédérique Cerisier: Hello François.


François Doux: Before discussing the political developments in Spain, let’s look at its economic performance. Obviously, one thinks back to the crisis in 2008, which hit both the banking and real estate sectors, since when we have seen a recovery in the Spanish economy.

Has this continued?


Frédérique Cerisier: Yes, of course. We still picture a country in full recovery. Overall, the past five years have witnessed an average economic growth of 3% in Spain. In 2019, it will be a little over 2%, a high and enviable level for many of its European neighbours.

That said, the slowdown that is settling in Europe is also affecting Spain, and more specifically as changes to its economic model that were born of the crisis have made the country a bit more dependent on exports than it was in the past.


François Doux: On the topic of exports, does this mean that the Spanish economy will deteriorate over the next few months?


Frédérique Cerisier: Yes, slightly. Once again, we can see that growth has slowed down only very gently so far. This has notably been the case as growth has been supported by domestic demand, household consumption and corporate investment. But survey data are deteriorating, particularly in the manufacturing sector. For example, Purchasing Managers’ Indices have clearly settled in contraction territory since the summer.

The last significant element to bear in mind is that the labour market is starting to slow down. Job creation has been strong in recent years, but has decelerated to below 2% in the third quarter of 2019, a 5-year low. Meanwhile, given the past vitality of the labour market, the supply of labour by the active population has rebounded.


François Doux: Does this mean that Spanish unemployment will rise?


Frédérique Cerisier: Perhaps not by very much. What is clear is that it has stabilised throughout 2019 at a still-high level of over 14%. As a result, even though we are not expecting a significant increase in unemployment over the next few quarters, it is clear that a slowing of job creation will weigh on domestic demand and slightly reinforce the slowdown in growth.


François Doux: So now let’s turn to the political situation. Spain has had four elections in four years. It went to the polls in April of this year, and then again on 10 November. What was the outcome?


Frédérique Cerisier: Well, no fundamental change actually, although there have been fairly significant shifts in the right wing, with a collapse in the number of centrist Ciudadanos representatives and a new leap forward for the far right party, which became the country’s third political force. On the left, there has been no change in the balance of power. The leading party remains Pedro Sanchez’s socialist party, but they have gained no ground and only received just under 30% of the votes. As a result, the Congress of Deputies remains highly fragmented.


François Doux:  So will Pedro Sanchez, the former head of the government, and the leader of the socialists, be able to form a new government in the end?


Frédérique Cerisier: Despite everything it is possible, because the outcome of the vote forced him to seek an immediate agreement in principle with the radical left party Podemos to form a minority government. However, this might not be enough, precisely because this would be a minority coalition. To form the government, this coalition would have to hope for the “friendly” abstention of other members of the Congress of Deputies.
Such support could come from the centrist Ciudadanos party, which has seemed unwilling to provide it so far, or from some of the constellation of regional and nationalist parties also represented in the Congress of Deputies. In particular from Catalan separatist representatives, who would once again hold the role of arbitrators in the assembly.


François Doux: So this difficulty in forming a government, building a stable parliamentary majority, could persist after each fresh election in Spain?


Frédérique Cerisier: Yes, if there is a minority coalition in power the question will arise each time. We can expect difficulties to form a government, but also to implement policies. More generally, it will be difficult for the coalition to survive. Seen from this angle, the length of a full legislative term seems like a very long time indeed.


François Doux: One crucial question to end on. What economic impacts has this political instability created and what can we expect?


Frédérique Cerisier: Over the past several years we have seen a fairly rapid succession of fragile governments in Spain, with, in some cases, fairly long transition periods between two governments. In the short term, this has not had a particularly strong impact on the country’s economic trends. We have seen that the country has enjoyed a rapid economic recovery in recent years, with no major setbacks.

However, over the years, this has had an impact on the difficulty in carrying out reform policies, which require time and political capital, two things that the various governments have not had in the recent past, despite the fact that the country still faces structural challenges, notably in the labour market.

Fiscal policy provides another good example. The most recent budget that passed in Spain was for 2018, and it was not voted until the middle of that year. No budget was voted for 2019, and we can already say that it will be difficult to pass one for 2020, with probably a great deal of wrangling.

So, once again, this will not prevent the Spanish economy or government from functioning in the short term. But one of the consequences has been that the country has not been able to take full advantage of the extremely favourable conditions of the past few years, for example to further consolidate its public finances.


François Doux: Thank you, Frédérique Cerisier, for this update on Spain’s economic and political situation; there is so much to keep an eye on both in Madrid and in Barcelona.

Coming up, the Chart of the Month with William de Vijlder.





François Doux: US growth and monetary tightening: that’s the subject of this Chart of the Month. William de Vijlder, hello.


William De Vijlder: Hello François.


François Doux: On this chart, real interest rates in the USA show us the degree of restriction on monetary policy and the recession periods. What is the correlation between the two?


William De Vijlder: So, as we look back in time we can see all these recessions. Typically, we see very sharp increases in the Federal Reserve’s real interest rates which have then put a brake on economic growth. We might be tempted to conclude that this has triggered a recession.


François Doux: So what is the problem today?


William De Vijlder: It is very different. The environment today is completely different to what we have seen in the past. First, you will see that there is no grey bar, so we can relax, there is no recession.

We can clearly see that real interest rates have risen because they were very negative. Nominal rates were very low, so after we subtract inflation the result is very negative. So, there was an increase, real rates returned to zero, but then slipped back again.

Why? Because the period of monetary tightening was very short, and the Federal Reserve decided to cut its rates again, given that inflation remained entirely under control and the central bank was concerned about growth trends.


François Doux: So turning to real interest rates as a predictor of recession, the correlation is not really working, for the time being at least. This is particularly because rates are low, so if further cuts were needed, there would be less room for manoeuvre than in the past.


William De Vijlder: There are two ways of looking at this. First, we could say, “there is nothing to worry about, monetary policy will not trigger a recession”. This is a very important factor, notably for the financial markets which, in the past such as in this phase, or in this one, faced a more turbulent period of monetary policy, which affected the willingness to take risks. Today, as there is not this monetary turbulence, the appetite for risk is likely to remain strong.

However, there will come a moment when growth will falter, will not be strong enough, which could cause the appetite for risk to collapse. The problem that will then arise is that, with rates already very low, the scope to cut them further is extremely limited; this clearly opens the way to so-called ‘non-conventional’ policies.


François Doux:  So to sum up William de Vijlder, watch out for a sudden stop?


William De Vijlder: Yes. This is a concept that can be applied in this context. To a degree, it has been imported from the theory of capital movements where we sometimes observe a sudden stop in capital flows towards a given country.

Here, I would say that the risk of a sudden stop is that investors, who, with no monetary constraint, have continued to accept risk will say to themselves, “growth over the next few quarters will leave a lot to be desired, so it is time to take profits”. This could be a sudden shift, even though we have not yet seen it. It is something we will need to be vigilant about.


François Doux: Keep an eye on the Fed.

Thanks you, William de Vijlder Coming up, Three Questions on Lebanon with Pascal Devaux.





François Doux: Three questions on Lebanon where there is unrest on the streets.

Pascal Devaux, hello.


Pascal Devaux: Hello François.


François Doux: Let’s discuss the economy. Ratings agencies have downgraded Lebanon’s rating; the Lebanese economy is on the brink of a default. Tell us about it.


Pascal Devaux: The Lebanese economy is in a position of structural deficit, at several levels. The productive base is weak, hence the need for high levels of imports, and fiscal receipts are also limited and thus the government deficit is mounting up.

So there are two deficits. A current account deficit in its external accounts, and a fiscal deficit, both of which need to be financed thus creating debt. At present, debt is equal to around 150% of GDP. This is one of the highest levels in any emerging economy.

Bank deposits from non-residents, mainly the diaspora, provide the main means of financing this debt. So long as these deposits grow slightly faster than the deficits, Lebanon can finance itself and the wheel turns round.


François Doux: But that is not really the case. What triggered the deterioration of the Lebanese economy since 2011, since the Arab Spring?


Pascal Devaux: On top of the structural factors, two external factors have been to blame. First, in 2011, the Arab Spring and the influx of Syrian refugees to Lebanon provoked an increase in public spending and a slowdown in growth.

Then, in 2015-16, with the fall in oil prices, GCC countries (Gulf Cooperation Council) consumed less, through a fall in tourist visits and a reduction in purchases of real estate assets in Lebanon, which had been a significant resource for Lebanon’s economic activity and its external balances.

As a result, deficits increased, confidence in the country’s economic prospects declined and the inflow of deposits started to slow. Thus the resources needed by the Lebanese economy started to dry up in 2017-18.


François Doux: Third and last question, Pascal Devaux. In 2019, what provoked this economic blockage in Lebanon?


Pascal Devaux: In 2019, we have seen an acceleration in this loss of confidence, and, most importantly a political crisis that has completely blocked the economy. This has had the notable consequence of a fall in bank deposits, particularly from non-residents, and thus a lack of resources to finance the Lebanese economy. From this position there are two solutions: either reducing outflows, for example through capital controls and a reduction in imports (although this would not be tenable for long, as it would suffocate the economy); or finding other resources. The most likely source of these are the Gulf countries, whose financial support (which would need to be substantial) could help Lebanon avoid full-blow economic crisis and a default.


François Doux: Pascal Devaux, thank you. One more to watch. As for us, we’ll see you in 2020 for another edition of EcoTV. Meanwhile, on behalf of the team here at EcoTV and the whole Economic Research team at BNP Paribas I wish you a very happy festive season.

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