eco TV

EcoTV – March 2020

3/10/2020

TRANSCRIPT // EcoTV – March 2020 : March 2020

Hello everyone, and welcome to the March 2020 edition of EcoTV, the video magazine from BNP Paribas economists.

Coming up, how can we measure the impact of coronavirus on the world economy? Some answers from Chief Economist, William de Vijlder.

In the Chart of the Month we will be looking at growth in Central European countries. It is holding up better than elsewhere. This is particularly true of Poland. More details with François Faure.

To close, Three Questions on the French labour market. Good news for 2019. Will this last through 2020? Hélène Baudchon will have the answers at the end of our programme.

 

FOCUS

François Doux:

Turning first to the global economy, specifically global growth

William de Vijlder, hello.

William De Vijlder:

Hello François.

François Doux:

A few weeks ago at the beginning of the year, we were talking about a gradual improvement in the global economy. And then there was the coronavirus outbreak in China. Has the virus already had a macroeconomic impact?

William De Vijlder:

Well, so far we have mainly seen figures concerning individual companies or what we call “high-frequency” data for China: daily traffic levels which tumbled and have not picked up since the Chinese New Year. Coal consumption and traffic through airports have both also collapsed, obviously.

All these indicators have clearly confirmed the image of an economy at a standstill, to put it in rather black and white terms. And of course, economists have been waiting impatiently for macroeconomic data.

François Doux:

Apple, like other electronics companies, has reported supply delays, which highlights China’s presence in production chains.

William De Vijlder:

Absolutely. This phenomenon comes into play. Some automobile manufacturers have said that they could be forced to shut down production due to a lack of supply from China.

Companies are on alert for the possible impact of the epidemic on their revenue and margins. Some have gone as far as to say they will no longer give guidance on future earnings, as the range is so broad that it serves no purpose.

François Doux:

As an economist looking for advanced signals, you look at the Purchasing Managers Indices, which you will tell us about. These much discussed PMI indices already offer us some answers.

William De Vijlder:

By their very nature these indicators are important, and are closely followed by economists as they are the first to be published. In concrete terms, on 21 February, data was published that was gathered in the first half of the month. This shows just how up-to-date and responsive the figures are. The yellow line on the screen shows the composite PMI, that is to say the combined index for the manufacturing and services sector, for the eurozone. We can see that the rising trend, since last October or so, has continued. This is fairly counter-intuitive, and it is a source of comfort.

We can also see here that the business climate in Germany – the red line – has improved slightly. Germany is a particularly important indicator, given that the country is extremely exposed to trade with China.

François Doux:

We will talk a little more about the eurozone later, William De Vijlder. Is the coronavirus shock only temporary?

William De Vijlder:

From a purely “medical” point of view, yes, it is temporary. For an economist, the question is this: when will we see truly convincing signs that the worst is behind us? This is an extremely important question because, even with a temporary shock, are we talking about one quarter, two quarters, three quarters? The chart here shows some of an economist’s thinking. It shows activity levels in a completely stylised way. Here we can draw the link with China, where we expect a very sharp drop in activity in the first quarter. And then a recovery. So here, I have put the bulk of the shock in Q1; the beginning of Q2 will still be difficult, for April, and then things will improve. I will allow you to decide whether this qualifies as a V or a U shape. To state the obvious, what matters is the horizontal element, we do not yet know if it will last one month or two. What we can say, however, is that the economic data that will come out in March (activity levels, spending) and will include data from surveys taken in February, will be bad. And they will still be bad in April. At best, I would say, towards the end of April, purchasing directors will, let’s hope, indicate that the worst is behind us.

François Doux:

And for the whole of 2020? I know it’s a tough question.

William De Vijlder:

Yes, because this stylised V or U also obviously raises the question of a rebound. Why is the rebound so strong? I believe that we can expect a clear trend towards rebuilding inventories. There is also the phenomenon of unsatisfied demand. For instance in China at present, we have seen a collapse in car sales. Naturally, people do not want to buy a new car. Those who were planning to buy a car in the first quarter will order it in the second. Those who were planning to buy one in the second quarter will do the same. This could then produce a rebound in order books.

François Doux:

Returning to the eurozone. Have you changed your growth forecasts, or not yet?

William De Vijlder:

Yes, we have adjusted them. Clearly, everything begins in China. For the year as a whole, we have downgraded our estimate of growth in China by 1.2%. This now gives us an estimate for the full year of 4.5%. In the eurozone, we have an estimate of 0.7%, which represents a slight reduction. As you said at the beginning, the economy looked in better shape at the beginning of the year. So this is the underlying trend that should return once the temporary shock is over.

François Doux:

And there is one topic that is dear to your heart. Uncertainty, the fog that sometimes obscures our view. Looking at the newspapers, the peak of the epidemic could be behind us, although this is all in the conditional. So have we got more visibility for tomorrow?

William De Vijlder:

The word “fog” is interesting in that, to an extent, when we look at the market reaction we have the impression of confidence, that after the fog we will see clearly again. We are more or less untroubled.

So we need to be ready for surprises that would largely be negative in the coming weeks. Why? Because it is very difficult to understand how all this might affect the sales figures for a company, or indeed macroeconomic data. What matters, however, is the number of new cases. Is the number going down? Figures for new cases in the epidemic will be really crucial. They will allow us to look beyond the disappointing economic statistics that we would expect to see.

François Doux:

So there are lots of figures and statistics to keep an eye on. One last question William De Vijlder: will the coronavirus have permanent consequences for the structure of the global economy?

William De Vijlder:

There is a strong chance that it will lead to some adjustments to production chains. There were already some factors pushing in this direction, such as issues of cybersecurity. But this situation will push companies to consider whether their production chains are highly dependent on what happens in a given country, and whether they are exposed to disruption of production in a very limited number of countries, which is a situation that should be avoided. I think that clearly this will trigger some changes in value chains, notably making them shorter, and another little bit of deglobalisation.

François Doux:

In any event, it looks as though we will have plenty of interesting topics to discuss over the coming months. Thank you William De Vijlder for this update on the impact of coronavirus on the world economy. Next we’ll look at the Chart of the Month, which focuses on the countries of Central Europe, where growth, for the time being, is holding up pretty well.

 

THE CHART OF THE MONTH

François Doux:

We hear a lot about slowing global growth, but some countries are bucking the trend. This is particularly true of Central Europe.

François Faure, hello.

François Faure:

Hello.

François Doux:

In today’s Chart of the Month we will be looking mainly at four countries: Poland, Hungary, the Czech Republic and Slovakia. Growth slowed slightly, to 3.8% across these four countries in 2019. But the growth differential with the eurozone remains in place. There is a 2.6% gap. Where is this economic outperformance by these four countries coming from?

François Faure:

The growth differential comes mainly from domestic demand. And in particular from consumer spending. These economies are currently experiencing a very stretched labour market, with historically low unemployment, which is pushing up wages. So even though inflation is rising, the purchasing power gains are very significant. In addition, with interest rates still pretty low, consumer credit is boosting consumer spending.

François Doux:

What is interesting to see is the export performance of these four countries. It’s not the same picture for all of them.

François Faure:

Yes. On the one side we have the Czech Republic and Slovakia, which are suffering from the combined effect of significant dependence on Germany, a major trading partner, and their exposure to the automotive market.

François Doux:

And the chart also shows that Poland is outperforming strongly in terms of exports. Why ?

François Faure:

There are three reasons for this. The first is that Poland, compared to the other countries, remains the major exporter of agricultural products and livestock. These make up 13% of Polish exports. This share is more than double that of the other countries.

François Doux:

So Poland’s neighbours, its trading partners, continue to import agricultural commodities. What is the second reason for the outperformance?

François Faure:

The second reason is that Hungary, the Czech Republic and Slovakia are amongst the countries with the highest level of integration in global value chains according to the OECD rankings. Poland is a long way behind on this measure. As a result, the negative multiplier effects from the slowdown in Germany are felt less in Poland than in these other countries.

François Doux:

And the third and last reason.

François Faure:

The final reason is the trend in unit labour costs. Although wages have risen in Poland, they have increased a little less than in the other countries. This means that Poland has managed to control labour unit costs thanks to productivity, and it has done this better than the other countries.

François Doux:

Can we conclude that to some extent Poland will escape the widespread slowdown in growth in 2020?

François Faure:

What we can say is that Poland will suffer less from a slowdown in exports, even though, as for the other countries, we expect growth to slow.

François Doux:

Thank you François Faure for this update on growth in Central European countries.

Coming up, Three Questions on the French labour market with Hélène Baudchon.

 

3 QUESTIONS

François Doux:

Three Questions on the French labour market. We have just seen the 2019 figures.

Hélène Baudchon, hello.

Hélène Baudchon:

Hello.

François Doux:

First question. The labour market and unemployment figures for 2019 have been described as positive. Why?

Hélène Baudchon:

First because there was fairly substantial job creation in the private sector (217,000 as an annual average).

2019 was also the sixth consecutive year of growth in employment, a long sequence that is fairly exceptional, with a total of nearly 1 million jobs created since the low point of 2014.

Another remarkable and positive development has been the creation of jobs in industry for the second consecutive year. Admittedly the figure was very modest, but this return to positive territory comes after 16 years in the red. Lastly, on the employment side, there was another positive indicator. We have a number of signals suggesting an improvement in the quality of employment (more permanent contracts, fewer temporary contracts and an increase in the qualification level of jobs held).

François Doux:

So that covers job creation. What about unemployment?

Hélène Baudchon:

The good news comes mainly from the fact that it fell to 8.1% by the end of 2019, its lowest level since mid-2007, that is to say during its last downward phase. The current fall in the unemployment rate, which began in mid-2015, has been gradual but steady. So, in the end, it has added up to something fairly substantial, with the unemployment rate coming down by a total of 2.4 points. Other indicators confirm the improvement in the labour market, including the increase in the employment rate, the fall in part-time working, and the falls in underemployment and in long-term unemployment. There are, however, a couple of negative points in the overall picture: the French unemployment rate remains high in absolute terms and, unusually, it is higher than the eurozone average, by about 1 point according to Eurostat figures.

François Doux:

Why are these unemployment and employment figures being talked of as being remarkable?

Hélène Baudchon:

The first reason is that job creation has proved more resilient than growth. Growth lost half a point between 2018 and 2019 (dropping from 1.7% to 1.2% as an annual average), but private employment growth barely flinched, growing by 1.1% in 2019, after 1.2% in 2018. The second remarkable feature is that the fall in the unemployment rate was bigger in 2019, when it dropped 0.6 of a point, than in 2018 when it fell by 0.4 of a point. These trends all more or less fit together: growth has slowed, but remains sufficiently strong to create jobs.

François Doux:

But it is not just a growth effect?

Hélène Baudchon:

No indeed, it is not just a growth effect. There are other reasons for this good performance in the labour market. First, the slower growth in the active population helps bring down the unemployment rate. Secondly, there is the slowing trend in labour productivity gains (which means that for a given level of growth there is a greater number of jobs) and, thirdly, there have been specific measures to increase the employment content of growth, for example reductions in the cost of employment, support for apprenticeships and professional training and the relaxation of some labour regulations.

François Doux:

Final question, Hélène Baudchon. What can we expect for the coming months? Will we reach President Macron’s target of 7% in 2022?

Hélène Baudchon:

It is possible, if the same causes produce the same effects. That is to say if the three parameters that I just mentioned continue to work positively (which we think looks highly likely) and if growth remains fairly clearly above 1%, which is a big “if”, a strong assumption. So the target unemployment rate of 7% in 2022 cannot be taken for granted, but at least now it looks achievable, which is to be welcomed.

François Doux:

Thank you Hélène Baudchon for this update on the French labour market. For more on this, check out our “Macro Waves” podcast on the labour market in France, available on all streaming platforms. It’s called “Macro Waves”. I’ll be back in a month’s time for the next edition of EcoTV.

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