eco TV

EcoTV – February 2021

2/9/2021

TRANSCRIPT // EcoTV – February 2021 : February 2021

THE HEADLINES

FRANÇOIS DOUX

At this point in February 2021 it is hard to predict growth over the next few months. We will nevertheless get an update on Portugal, with Guillaume Derrien, and on Tunisia with Stéphane Alby in Three Questions at the end of the show. We will need to keep an eye on inflation, it could start to rise again. That is William De Vijlder’s analysis, which he will discuss in the Chart of the Month. Enjoy the show.

 

FOCUS

FRANÇOIS DOUX

This month we are focussing on Portugal, one of the countries hit hardest by the coronavirus pandemic. It has one of the highest rates per 100,000 population in the world.

Guillaume Derrien, hello.

GUILLAUME DERRIEN

Hello François.

FRANÇOIS DOUX

Portugal has gone back into lockdown. A hard lockdown. Growth estimates for 2021 have been downgraded.

GUILLAUME DERRIEN

Exactly. If we rely solely on estimates from the Bank of Portugal, we would expect a growth of around 4% in 2021 before a slight acceleration to 4.5% in 2022. But what is clear is that the figures will be below what we might have hoped for a few weeks ago, as a result, as you say, of the resurgence of the epidemic.

FRANÇOIS DOUX

Will Portuguese companies and the labour market cope at a time when government support could be scaled back?

GUILLAUME DERRIEN

That is the big question. I would/will? refer to an article from the Bank of Portugal published in January, so very recently, which assessed the impact of Covid on the profitability and the stock of debt at risk for Portuguese companies. This article shows that risks have increased significantly as a result of the epidemic, but we remain at risk levels below those we have seen in previous crises. There are two reasons for this: the fall in interest rates, which has reduced the burden of debt servicing for companies; and the deleveraging trend undertaken by Portuguese firms in the years prior to the epidemic.

FRANÇOIS DOUX

These are fairly positive effects. But are there short-term risks for the Portuguese economy in 2021?

GUILLAUME DERRIEN

The risks are largely the same as they were in 2020. First, the economy is heavily dependent on international tourism, which accounts for around 8% of GDP. We can expect this economic activity to recover fairly slowly, even after the end of the pandemic. Secondly, there are exports. Portugal depends heavily on European demand, more than other countries such as France and Italy. Portugal exports comparatively little to China and the USA, where demand has remained strong. Thus, it seems likely that the recovery in demand in these two countries will be of less benefit to Portugal than to other European nations.

FRANÇOIS DOUX

Let’s turn now to the medium to long term. What are the risks to this famous potential growth?

GUILLAUME DERRIEN

The risks are on investment. With companies seeing debt rising and profitability falling, it seems reasonable to expect that they will spend less on investment. The second risk is the rise in government debt. Portugal has very high debt, and following 2020, we might expect the stock of public debt to have risenabove the 130% of GDP threshold. This would be the third highest level in Europe.

FRANÇOIS DOUX

So, Guillaume Derrien, are there any reasons to be optimistic about the Portuguese economy?

GUILLAUME DERRIEN

Yes. The first factor is the resilience of employment to the economic shock. With the measures introduced by the government, notably the temporary unemployment scheme, employment fell only slightly in 2020 and European Commission forecasts for the next two years predict that by 2022 the unemployment rate will be more or less what it was in 2019. If this effectively occurs, this would be a fairly encouraging development.

FRANÇOIS DOUX

You mentioned the level of Portugal’s debt. However, interest rates are very low. Portugal has even borrowed at negative rates.

GUILLAUME DERRIEN

Exactly. This is a trend that could extend over the coming years, or at least through 2021 and 2022. This will mean that the scale of the debt is softened somewhat by low interest rates.

FRANÇOIS DOUX

Will the European recovery package benefit Portugal?

GUILLAUME DERRIEN

Yes, of course. Portugal will receive around 7% of its GDP in subsidies over the next five years. This is a significant amount. Clearly, this will help Portugal implement a recovery programme over the next few years.

FRANÇOIS DOUX

The last significant factor, as we saw in January, is the relative political stability.

GUILLAUME DERRIEN

Exactly. We saw this at the end of January, with the re-election of President Marcelo Rebelo de Sousa. And more generally, government stability – in contrast to other countries, we see the current situation in Italy – provides a degree of uncertainty, particularly for investors.

FRANÇOIS DOUX

And a bonus question for you, Guillaume Derrien. Portugal is now assuming the Presidency of the European Council. What can we expect?

GUILLAUME DERRIEN

I think that we will see an extension of what we saw under the German Presidency over the past six months. In particular, Portugal will do everything it can to push through the implementation of the European recovery plan in 2021.

FRANÇOIS DOUX

It certainly needs it. Thank you Guillaume Derrien, for this update on the Portuguese economy. Coming up, the Chart of the Month with William De Vijlder.

 

CHART OF THE MONTH

FRANÇOIS DOUX

In the Chart of the Month we will be looking at eurozone inflation. Will it finally bounce back?

William De Vijlder. Hello.

WILLIAM DE VIJLDER

Hello François.

FRANÇOIS DOUX

We know that in Frankfurt, the European Central Bank is paying a lot of attention to this question.

WILLIAM DE VIJLDER

A key question!

FRANÇOIS DOUX

There are already several fairly clear, fairly legible factors that suggest a possible rebound in inflation. First, the labour market and unemployment. Will these drive an uptick in inflation?

WILLIAM DE VIJLDER

Not at all. This will be the last factor to push in this direction. In the short term, if anything, we expect unemployment to rise, so no acceleration in wage growth, and no upward pressure on inflation.

FRANÇOIS DOUX

The second fairly clear factor: energy prices, particularly the oil price. This has started to rise again.

WILLIAM DE VIJLDER

Yes, on a year-on-year basis we have indeed seen a contribution to higher inflation. It only accounts for a certain percentage, but is nevertheless a factor.

FRANÇOIS DOUX

And we have clearly a third factor, that affects only Germany. That is the ending of reduced VAT on 31 December 2020. This is another factor we would expect to see pushing up inflation in Germany.

WILLIAM DE VIJLDER

Yes, indeed. This is likely to be visible as soon as we see figures for January. But this is a German issue and does not affect the other nations.

FRANÇOIS DOUX

Now let’s look at what companies are doing to anticipate this return of inflation. In this chart, William De Vijlder, you use the blue line to show input prices, that is to say the prices companies pay for the commodities and the semi-manufactured products they buy for use in their production. Then, we have production prices, “factory gate” prices, if I can simplify somewhat. And the red line shows supplier delivery leadtimes. Obviously these peaked in 2020. Deliveries took longer because of the lockdowns in the eurozone. What is your analysis for 2021 now?

WILLIAM DE VIJLDER

These survey figures are very important. They show how companies are foreseeing the inflation situation. The sharp rises that we saw in delivery times and input prices suggest a coming acceleration in eurozone inflation.

FRANÇOIS DOUX

So, to go a little further, you have combined both input prices and delivery times. This is what we can see with this chart. The manufacturing sector Purchasing Managers Index, or PMI, the component of pressure on prices, and the blue line, of course, is underlying inflation, excluding food and energy. How do you interpret this chart? Will inflation rise?

WILLIAM DE VIJLDER

This is the conclusion we reach, but I would take a more nuanced approach. In effect, there is a 12-month lag between pressure on prices, the red line on the chart, and underlying inflation, the blue line. This lag says: “recently you have seen this pressure on prices being reflected by company responses to surveys. In 12 months, or so, we are likely to also see an acceleration in eurozone inflation.”

FRANÇOIS DOUX

So we also need to remain vigilant when it comes to supply side factors, such as those we discussed at the start of the interview.

WILLIAM DE VIJLDER

Absolutely. In particular we need to keep an eye on trends in unemployment and in demand. This will help understand whether this rise in inflation will be long-lasting or not. This is something to keep very much in mind, as it will affect the behaviour of financial markets through expectations about the statements coming out of the European Central Bank. Another important point, meanwhile, that I must stress, is that we are seeing a similar pattern when we look at the US economy.

FRANÇOIS DOUX

So, we will need to watch developments on both sides of the Atlantic. Thank you, William de Vijlder. Coming up, Three Questions on Tunisia with Stéphane Alby.

 

3 QUESTIONS

FRANÇOIS DOUX

Three questions on Tunisia, where events have taken a lively turn in these early weeks of 2021. A resurgence of the epidemic and a ministerial reshuffle barely five months after the inauguration of a Prime Minister in conflict with the country’s President.

Stéphane Alby, hello.

STÉPHANE ALBY

Hello.

FRANÇOIS DOUX

Is your forecast of 4% growth in the Tunisian economy in 2021 already under threat?

STÉPHANE ALBY

For the time being, we are maintaining this growth estimate because the Tunisian economy will most likely benefit from a powerful favourable base effect. The economic contraction in 2020 was one of the biggest in the region. A very strict lockdown in early March, the drop in demand from Europe, and of course the collapse of the tourism industry, resulted in a fall in GDP of over 8%. This means that even in the event of a rebound, the Tunisian economy will not fully recover all of its losses in 2021. But with the resurgence of the pandemic, both in Tunisia and in its main trading partners, this scenario appears very fragile, particularly if the political situation remains deadlocked.

FRANÇOIS DOUX

Second question. Are there other risk factors that could affect this trend in 2021?

STÉPHANE ALBY

Well, yes, Tunisia also stands out for the serious deterioration in its public finances. The budget deficit has widened to more than 10% of GDP, against an initial target of 3%, taking government debt to nearly 90% of GDP. The reasons for this worsening of the public finances are primarily cyclical. But there are also structural factors, particularly the new 15% increase in the public sector wage bill. This item now accounts for two-thirds of government revenues, which could restrict the implementation of stimulus measures if it is not better controlled.

FRANÇOIS DOUX

Third and final question. Let’s talk about the IMF. Like other countries, Tunisia has benefited from IMF support in the past, indeed in the fairly recent past. Negotiations for a new three-year financing plan are now under way. Why do you think that a deal with the IMF is essential?

STÉPHANE ALBY

First, the country faces considerable financing constraints, as the Tunisian government’s capacity to borrow locally is limited, and the deficit will remain high. Secondly, an agreement with the IMF would reassure investors and help unlock support from other funders. This is a key point. At present, nearly half of the stock of debt is held by official creditors, which limits the cost of debt service. Even so, interest payments have tended to rise rapidly in recent years. It is important to keep interest burden at a modest level to preserve the fiscal space to other spending necessary to economic development. In all of this, however, there are some encouraging signs. Most notably, the monetary situation remained stable in 2020 despite the shock, and Tunisia currently has sufficiently comfortable foreign reserves to honour its external debt service this year. However, there is no time to lose, because in the final analysis, the shock of the epidemic has exacerbated existing weaknesses in an economy that posted low growth for a decade.

FRANÇOIS DOUX

Thank you Stéphane Alby, for this update on Tunisia’s economy. We’ll be back in a month’s time for the next edition of EcoTV.

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