eco TV

EcoTV – November 2020

11/13/2020

TRANSCRIPT // EcoTV – November 2020 : November 2020

Hello and welcome to the November 2020 edition of EcoTV, the video magazine of BNP Paribas economists. To start this edition, we will talk with William De Vijlder about a health crisis that is fuelling uncertainty. He will talk about growth in Europe. There is also uncertainty in the forex market, where the Turkish lira has dropped to all-time lows against the dollar. We will conclude by looking at France’s 2021 budget. Lots of uncertainty there, too. Hélène Baudchon will present her outlook in Three Questions at the end of the edition.

 

FOCUS

 

FRANÇOIS DOUX

Let’s begin with an update on the economic environment in the midst of a health crisis.

William De Vijlder, hello.

 

WILLIAM DE VIJLDER

Hello François.

 

FRANÇOIS DOUX

Before speaking about the months ahead, let’s talk about the recent past, and the third quarter 2020 in particular. The third quarter was marked by the ending of the lockdown, and growth was very strong, even though it was widely expected.

 

WILLIAM DE VIJLDER

Yes, this spectacular performance will go down in history, much like the second quarter performance, but for the opposite reasons. As expected, it was a fantastic quarter.

 

FRANÇOIS DOUX

It was a mechanical rebound: growth dropped in the second quarter before rebounding in the third. So, how do you see the fourth quarter?

 

WILLIAM DE VIJLDER

There is this feeling that growth is winding down. Consequently, we are hardly looking at the third quarter, even though it is so important. What makes it so important is that it creates acquired growth. Momentum was so strong in the third quarter that even if the economy were to idle in the fourth quarter, we would still see growth on a quarterly basis.

 

FRANÇOIS DOUX

Strong momentum.

 

WILLIAM DE VIJLDER

Yes, momentum is very strong as we enter the fourth quarter.

 

FRANÇOIS DOUX

As an economist, you look at economic agents who consume and who invest to create growth. All of this has been called into question somewhat by the current health crisis.

 

WILLIAM DE VIJLDER

Not exactly. There were already some indicators and survey results for October that showed things were slowing down, notably in terms of expectations. Companies are becoming much more cautious when evaluating their expectations. Of course, we must also see this in the light of the sharp increase in the number of new Covid-19 cases in many European countries.

Another very important point that we are monitoring, like everyone else, are high-frequency data flows. We are looking at mobility, for example, via Google. In recent weeks, we have seen a veritable easing and even a downturn in data traffic, which is highly correlated to economic activity. So, we are a bit worried.

 

FRANÇOIS DOUX

Does that mean that faced with the uncertainty of a health crisis, we are putting off purchasing and investment decisions until a later date? Is that what is happening?

 

WILLIAM DE VIJLDER

We must distinguish between two types of purchases: are we dealing with everyday purchases or big-ticket items?

For big-ticket purchases, a lot obviously depends on how households perceive the labour market. During the lockdown, there was a sharp increase in fears about losing jobs. Since then, the situation has improved, but unemployment is still high and a major source of concern. And with economic momentum faltering in the fourth quarter, people are bound to become more defensive.

Another factor also comes into play. Even for everyday purchases, people are being more cautious, as they become aware that “there is a health risk and I am more exposed than in the past.”

 

FRANÇOIS DOUX

Last question. How do you see the year 2021?

 

WILLIAM DE VIJLDER

For first quarter 2021, I want to be optimistic. The recovery seems to be advancing in fits and starts. As we have seen, growth was very strong in the third quarter. The fourth quarter is still a big question mark. But all of this is dictated by the pace of new cases. Given the lockdown measures that have been taken, we should manage to lower the number of new cases, which will allow us to ease restrictions again. As restrictions are eased, growth tends to rebound. That is what I am hoping we will see in the first quarter. Yet this stop-and-start recovery has a major drawback: it does not provide much visibility over time. This factor will curb corporate investment. In the end, everyone is waiting -- with growing impatience -- for a vaccine, which would completely change the situation. Until then, we had best accept the idea of a stop and start recovery.

 

FRANÇOIS DOUX

In any case, the political, economic and monetary authorities are being extremely reactive. That is another factor that argues in favour of a little more confidence.

 

WILLIAM DE VIJLDER

That’s right. There has been both monetary and fiscal support, and all the measures that have already been taken by individual countries and at the European level. The Americans are now preparing a new stimulus plan.

And we mustn’t forget that China is a major trading partner for many European countries. It is the only country that has successfully entered a V-shaped recovery. This is a key factor for export momentum, especially for European exports.

 

FRANÇOIS DOUX

So, there is a gleam of hope, William De Vijlder. We will be back in a moment with our Chart of the Month on the Turkish lira, which has fallen sharply against the dollar. We are here now with Stéphane Colliac.

 

CHART OF THE MONTH

 

FRANÇOIS DOUX

In our Chart of the Month, let’s look at the forex market, and in particular, at the Turkish lira’s depreciation against the dollar. The Turkish lira has been depreciating constantly. At the end of October, it went below  the TRY8 to USD1 threshold for the first time.

Stéphane Colliac, hello.

 

STÉPHANE COLLIAC

Hello.

 

FRANÇOIS DOUX

Why has the Turkish lira been falling against the dollar for the past several months?

 

STÉPHANE COLLIAC

Actually, the lira has been falling for several years, and the current depreciation is only an extension of that movement. We can see that Turkey has a structural external deficit, which narrowed a bit in 2019 but then widened sharply in 2020. This external deficit is the first cause of this depreciation, since it means that currency is flowing out of the country rather than in. We observe also that capital flows have not fully financed the shortfall during recent years. And then there are the inflation differentials.

 

FRANÇOIS DOUX

Inflation in Turkey exceeds 12%, right?

 

STÉPHANE COLLIAC

About 12% yes. These inflation differentials are also structural, which argues for the lira’s depreciation against the dollar on the long run.

 

FRANÇOIS DOUX

In this chart, we can see a sharp decline in 2018. Things have calmed down ever since. What happened?

 

STÉPHANE COLLIAC

There was a currency crisis. The United States tightened their monetary policy. Emerging countries with significant inflation, external deficits or fiscal deficits were at risk of stronger capital outflows. It was particularly the case when monetary policy was not tightened enough, implying heightened forex pressures, which triggered the 2018 currency crisis.

 

FRANÇOIS DOUX

That brings us to monetary policy. In late October, the Turkish central bank made a decision that did not really please the markets.

 

STÉPHANE COLLIAC

Yes, the markets were disappointed. In March 2020, key rates were cut in response to the Covid-19 pandemic, which is perfectly normal since the economy needed some support. Yet inflation -- which was around 12% in March -- did not decline thereafter. So, this monetary policy stance became very accommodative, especially since the economy was also beginning to pick up again during the summer. This increased the downward pressure on the lira. In September, the central bank began to tighten monetary policy, and we expected it to continue in October. But that was not the case.

A policy rate was raised, but not the key policy rate. This is what disappointed the market, and the lira dropped below the threshold of TRY8 to USD1.

 

FRANÇOIS DOUX

Let’s talk about the consequences of a weak lira. It can’t be very good in terms of the country’s perception, but there must be some positive consequences?

 

STÉPHANE COLLIAC

Yes, for the country’s perception, it is not great for a currency to depreciate. It is not great even for Turkish people themselves, since it signals more inflation to come, since we know that there is a passthrough from depreciation to inflation. It is also a sign that imbalances have not been fixed. That’s for the negative side. The trade deficit was strong again, for example, due to the decline in tourism revenues. However, on the other hand, currency depreciation improves the country’s competitiveness. In 2021, for example, assuming the Covid pandemic comes to an end, people will begin to think about where they want to go on vacation next. What about Turkey, because it is not very expensive?

 

FRANÇOIS DOUX

That’s right. And Turkish exports are not as expensive either. Let’s conclude by talking about the months ahead. As an economist, what indicators are you going to watch to anticipate whether or not the Turkish lira will continue to slide?

 

STÉPHANE COLLIAC

There are several rather simple indicators: is the external balance, including the trade balance, deteriorating or not? What about inflation? We would need to see it a bit lower. And then there are the Central Bank’s foreign reserves, which can enable it to intervene to defend the exchange rate.

 

FRANÇOIS DOUX

Stéphane Colliac, thank you. We will be back in a moment with Three Questions for Hélène Baudchon on France’s 2021 budget.

 

3 QUESTIONS

 

FRANÇOIS DOUX

Three questions on France’s fiscal deficit. To put things into perspective, France had a deficit of 3% of GDP in 2019. The government is expecting a deficit of 10.2% in 2020 and 6.7% in 2021.

Hélène Baudchon, hello.

 

HÉLÈNE BAUDCHON

Hello.

 

FRANÇOIS DOUX

First question. What do you think about these huge figures?

 

HÉLÈNE BAUDCHON

Actually, they give us a good idea of just how exceptional the 2021 budget really is. It bears the brunt of two factors: the massive recessionary shock triggered by the Covid-19 pandemic and the government’s equally massive fiscal response, both to stimulate the recovery and to cushion the crisis.

 

FRANÇOIS DOUX

What exactly lies behind these figures?

 

HÉLÈNE BAUDCHON

There are several interesting details. The very sharp widening of the deficit in 2020 was essentially due to a cyclical shortfall arising from the plunge  in economic activity. There was also the negative impact of the emergency measures taken last spring to cushion the lockdown shock, which were counted as “one-offs”. Yet this negative impact was partially offset by an improvement in the structural deficit, for technical reasons that I will not go into here.

The year 2021 is somewhat of a mirror image. The narrowing of the deficit is due almost entirely to the improvement in the cyclical balance, thanks to the expected rebound in growth. Meanwhile, the reduction in one-offs will more or less offset the widening of the structural deficit due to the recovery plan.

 

FRANÇOIS DOUX

That brings me to my second question, the famous recovery plan: France Relance. What exactly does this plan contain?

 

HÉLÈNE BAUDCHON

It has three key characteristics. First, it is characterised by ambitious targets. The aim is to support growth in both the short term and the long term. The goal is for GDP to return to pre-crisis levels by 2022, which is a rather short horizon. The plan also aims to support long-term growth, thanks to the goal of “building today the France of 2030”.

The plan is also characterised by its three pillars: ecology, competitiveness, and social cohesion. The total budget of EUR 100 billion in 2020-22 is divided into three more or less equal amounts for each of the three pillars.

 

FRANÇOIS DOUX

And the third characteristic?

 

HÉLÈNE BAUDCHON

Yes, there is a third characteristic. The plan tends to give priority to supply-side measures rather than demand-side measures. Yet this emphasis is not all that clear-cut because a number of measures -- notably job-retention schemes and energy renovation -- will boost both supply and demand, support both companies and households, and will affect both the short term and the long term.

 

FRANÇOIS DOUX

Speaking of the short term, this brings me to my last question: what impact will the stimulus plan have on growth in 2021?

 

HÉLÈNE BAUDCHON

That’s the million-dollar question. The stimulus plan is bound to have a positive impact on growth. What’s uncertain is the size and rapidity of the impact. The government is taking an optimistic approach by forecasting growth of 8% in 2021, which is understandable. Behind this figure, the additional growth generated by the recovery plan is estimated at 1.1 points. And 80% of this additional growth comes from demand-side measures, including those to support households as well as public spending and investment efforts. Supply-side measures geared towards innovation, skills building and corporate taxation will kick in more significantly from 2023, and will add about 1 point to French GDP growth over the long term. The expected impact is sizeable, let’s just hope it materialises as planned.

 

FRANÇOIS DOUX

Of course, all of this continues to hinge on the outcome of the health crisis. Already there have been four amended budget bills in 2020, so we will have to wait and see what happens in 2021. Thank you for this update, Hélène Baudchon.

Tune in again next month for a new edition of EcoTV.

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