eco TV

EcoTV – September 2020

9/10/2020

TRANSCRIPT // EcoTV – September 2020 : September 2020

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

To better understand the global economy in the midst of the Covid-19 pandemic, chief economist William De Vijlder will comment on two indicators worth following in the months ahead.

In the Chart of the Month, Guillaume Derrien will talk with us about Spain and a rare bright spot on the horizon for the Spanish economy.

We will conclude this edition with Three Questions on Argentina with François Faure, who will examine the sustainability of Argentina’s debt after the agreement reached with private creditors.

Enjoy the show!

 

FOCUS

 

FRANÇOIS DOUX

The summer holidays are over.

We are entering the homestretch for this chaotic 2020, which has been an unpredictable year for economists, too.

William De Vijlder, hello.

 

WILLIAM DE VIJLDER

Hello François.

 

FRANÇOIS DOUX

The next four months will be marked by the spread of the Covid-19 pandemic as well as by the US elections. We will speak more about this in other editions of EcoTV, but for the moment, let’s focus on September.

In recent months, the technology indexes have surged. The FANG index -- comprised of Facebook, Amazon, Netflix and Google – has broken all records. We also saw the symbolic entrance of Salesforce, a customer-relations software publisher, to replace Exxon on the Dow Jones, the index of the 30 largest market capitalizations on Wall Street.

Does this mean the new global economy will be even more high-tech than before? As an economist, how do you see this?

 

WILLIAM DE VIJLDER

Yes, it will be, and I would add “without a doubt”, because there is no stopping technological innovation. If there is a way to make things more sophisticated, more digital or more automatized, then you can be sure we are going to do it from a technological perspective. But it is also necessary from an economic point of view. Companies hard hit by the pandemic will seek to improve profitability in a growth environment that risks faltering structurally due to the health shock. Spending cutbacks and cost controls should encourage even further digitalisation, automation and robotization.

 

FRANÇOIS DOUX

That is effectively true from a medium to long-term perspective. But what about the very short term, the third quarter, which includes the summer months? Shouldn’t we expect the global economy to rebound, if nothing more than an automatic rebound?

 

WILLIAM DE VIJLDER

That’s true. And you are right to insist on the word “automatic”. It might create the illusion that the worst is behind us. Indeed, we have seen the worst, but it would be illusory to assume that “everything is alright” again. That would be an illusion. Although the automatic rebound should fuel a very big surge in third-quarter growth, it is only a mirror image of the collapse in Q2 activity. It is important to look beyond these figures to see the underlying trends.

 

FRANÇOIS DOUX

At least the underlying trends are getting a boost from economic policies -- both monetary and fiscal policies -- and from the major efforts that have been made since the outbreak of the pandemic. Will this economic policy support continue?

 

WILLIAM DE VIJLDER

Yes, and it is crucial. By definition, when several factors of very high uncertainty coincide, especially with a health risk, it is reassuring to have some support factors providing very high visibility. This is clearly the case with monetary policy and the Fed and the ECB’s messages. They will continue to follow current policies and are prepared to strengthen them if necessary. No ambiguity here.

As to fiscal policy, the message is similar. In Europe and the Eurozone, we have seen very big announcements by Germany, France and several other countries. But the really big news is the historic European agreement totalling 750 billion euros, to be deployed as of 2021. In contrast, there is a real problem in the United States. As you mentioned earlier, the US is in the midst of a pre-electoral period, and it will be extremely difficult for the Democrats and Republicans to reach any kind of agreement. This is a problem because the economy needs another stimulus.

 

FRANÇOIS DOUX

Another boost. What indicators will you be following to better understand the economy during this time of uncertainty?

 

WILLIAM DE VIJLDER

A new stimulus is so important because the key indicator today is not economic, but psychological. It’s a matter of confidence. The problem with confidence is that it can quickly lead to a vicious circle. When there is confidence right from the start, then spending will be on target, confidence will improve and companies will make even bigger investment and hiring efforts. We would be on an upbeat trajectory. When confidence is lacking from the beginning, however, it becomes very important to have good visibility over economic policy, and fiscal policy in particular. It is important for households, since everything depends on the job market situation. In the United States, forecasts are calling for unemployment to decline gradually, but it risks being a rather slow process. That creates a relatively tough environment for household consumption.

As to Europe, analysts for the European Union, the European Commission and the ECB, as well as our own analysts, expect unemployment to continue in the quarters ahead, into 2021. This risks creating headwinds for the economy and growth because consumer spending is likely to be more sluggish.

 

FRANÇOIS DOUX

You brought up consumption. What should we be looking at in terms of companies?

 

WILLIAM DE VIJLDER

The main factor is to monitor their financial health. At first, companies mainly had to deal with cash flow problems and a liquidity squeeze. Today, we must focus more on corporate solvency. This is another reason why monetary and fiscal support, including a very accommodating financial environment, are extremely important.

 

FRANÇOIS DOUX

To summarize, we should monitor job creations and destructions, unemployment figures and for companies, bankruptcies. Like solvency ratios, this is an indicator that you have already talked about. Thank you, William De Vijlder.

 

WILLIAM DE VIJLDER

It’s been my pleasure.

 

FRANÇOIS DOUX

Thank you for this September 2020 update. Tune in again in October for a new update.

Let’s now go to the Chart of the Month. Today our focus is Spain, with Guillaume Derrien.

 

CHART OF THE MONTH

 

FRANÇOIS DOUX

Our Chart of the Month is devoted to Spain, which was hit by one of the sharpest contractions, with GDP down 18.5% in the second quarter of 2020. Guillaume Derrien is here to talk more about Spain.

Hello Guillaume.

 

GUILLAUME DERRIEN

Hello François.

 

FRANÇOIS DOUX

You have chosen to look at the purchasing managers index, or PMI, for the manufacturing sector, and more specifically, for the consumer goods sector. Why have you chosen this chart?

 

GUILLAUME DERRIEN

Simply because it’s one of the rare bright spots among Spanish statistics. As the chart shows, the PMI index for consumer goods has rebounded strongly since May. In July, it rose to 58.8, the highest level since November 1999.

 

FRANÇOIS DOUX

These confidence indexes have a red line at 50. When the index is above 50 we are in expansion territory. Below 50, it is signalling a contraction and the beginning of recession.

Are these numbers in line with the other Spanish statistics?

 

GUILLAUME DERRIEN

Yes, of course. They can also be seen in somewhat more tangible data like automobile and retail sales, which have also climbed strongly since the lockdown was lifted in May. In July, car sales rose above February’s level and were about 2% above pre-lockdown levels.

 

FRANÇOIS DOUX

Why is that?

 

GUILLAUME DERRIEN

There are mainly two reasons. First, government subsidies have helped stimulate the replacement of the existing car fleet. In June, the Spanish government launched the RENOVE 2020 programme, with offers subsidies of up to 5000 euros for the purchase of cleaner cars. This has had a direct impact.

The second reason is that there has been a transfer of consumption from services -- which slowed much more sharply due to the impact of the coronavirus -- towards consumer goods.

 

FRANÇOIS DOUX

This is one of the rare sectors that is performing well?

 

GUILLAUME DERRIEN

Yes, and the important thing is that this sector also underpins Spanish exports.  Consumer good exports accounts for about 35% to 40% of total exports of goods. In this specific segment, Spain has reported a major trade surplus -- roughly 3 billion euros -- for nearly the past 10 years. There has been a similar rebound in consumer goods in France and Germany, which could also boost Spanish exports in the months ahead, assuming, of course, that the pandemic remains under control.

 

FRANÇOIS DOUX

E-commerce is also expanding rapidly in Spain, but that is not the whole story either.

 

GUILLAUME DERRIEN

Unfortunately not. E-commerce has increased very strongly, up more than 50% in the second quarter. Unfortunately, this rebound will not offset the drop-off in services. As you pointed out, GDP contracted very sharply in the second quarter, and tourism activity was also very sluggish over the summer months due to the pandemic. This rebound will not offset the drop-off in activity in hotel and food services nor in transport.

 

FRANÇOIS DOUX

Thank you, Guillaume Derrien. We will be back in a moment with Three Questions on Argentina with François Faure.

 

3 QUESTIONS

 

FRANÇOIS DOUX

We now have Three Questions on Argentina.

François Faure, hello.

 

FRANÇOIS FAURE

Hello, François.

 

FRANÇOIS DOUX

In late August, the Argentine government signed an international debt relief agreement with its private creditors.

My first question: what about the recession in Argentina and the country’s health situation?

 

FRANÇOIS FAURE

Like all other countries, Argentina was hit by a very sharp recession. The main difference is that Argentina has already been in recession for the past two and a half years. Currently, the cumulative decline in GDP since Q1 2018 is 25%. That is enormous! The health crisis obviously strained the country’s economic performance in the second quarter, as it has in other countries around the world.

 

Argentina is still partially locked down, at least in Buenos Aires and the Greater Buenos Aires area. They have been in lockdown for the past four months. One positive point compared to other countries in the region is that Argentina has managed to successfully contain the pandemic. To give you an idea, Argentina currently has fewer than 200 deaths per million, whereas Brazil has reported more than 500 deaths. For the other countries in the region, the figures are much higher than in Argentina.

 

FRANÇOIS DOUX

My second question: what about the famous international debt restructuring agreement with its private creditors?

 

FRANÇOIS FAURE

This agreement is very positive, providing a real shot in the arm. We have been waiting for it for months. Argentina managed to spread out its bond repayments with its international creditors – with massive repayments as of 2025 -- while lowering its interest payments.  

As I said, this is going to give the government a shot in the arm, which like all the other countries worldwide, will see its deficit widen.

 

FRANÇOIS DOUX

Let’s conclude with a third and final question. Debt restructuring does not necessarily mean debt forgiveness. How sustainable is Argentina’s debt in the medium term?

 

FRANÇOIS FAURE

Indeed, restructuring did not result in debt forgiveness. Creditors would not accept it. The amount of debt remains the same, and the debt ratio does not change. Currently, there is abundant monetary financing of the fiscal deficit, which means the central bank is advancing money to the government, thereby maintaining currency depreciation and inflation. There are grounds to fear a new forex shock. Since the debt has not changed, its structure has not changed either. If the peso were to depreciate very sharply, it would automatically increase the debt ratio. So debt sustainability is not assured.

 

FRANÇOIS DOUX

We must remain vigilant when it comes to Argentina’s debt. Thank you, François Faure.

Tune in again in October for a new edition of EcoTV, which will be presented in a new setting.

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