eco TV

EcoTV – April 2021

4/9/2021

TRANSCRIPT // EcoTV – April 2021 : April 2021

INTRODUCTION

FRANÇOIS DOUX

Hello and welcome to a new edition of EcoTV, the video magazine of BNP Paribas economists. Welcome to our virtual studio for this April 2021 edition. Today we will talk with three economists whom you all know well: William De Vijlder, the Chief Economist at BNP Paribas; Hélène Baudchon, our specialist on France and Stéphane Colliac, who will talk about Turkey. Welcome to the three of you.

We will begin with William De Vijlder and our Focus on the global economy. To take the pulse of the cyclical environment, we will look at economic statistics, of course, but also the health crisis and inflation expectations. In our Chart of the Month, we will take a closer look at inflation. In Turkey, inflation is rising alarmingly fast. And yet, Turkish GDP growth has returned to pre-crisis levels. Stéphane Colliac will tell more about this. To conclude this programme, we will talk with Hélène Baudchon about the zombification of the economy. Who are these zombies companies? Are they a real problem? How bad is the damage? We will talk more about all this at the end of the show.

 

FOCUS

FRANÇOIS DOUX

To analyse the global economy for the most advanced countries in 2021, we must look at three factors: their economic performance, the handling of the health crisis, and their recovery plans, which suggest that there might be a little inflation. To talk more about this, we are with William De Vijlder, our Chief Economist. Hello William.

WILLIAM DE VIJLDER

Hello François.

FRANÇOIS DOUX

Economic statistics for the first part of this year are better than expected. Could you talk in more detail about how you see this?

WILLIAM DE VIJLDER

Sure. We welcome this particularly favourable development. It was already clear in the US, where the economy had begun to recover. And before that, there was China’s spectacular performance. What we would like to underscore here is that signs of a recovery can also be seen in the European Union, and even in Japan, both of which had been lagging somewhat. We can see clear signs of improvement, not only in the manufacturing sector but in other sectors of the economy as well.

FRANÇOIS DOUX

Concerning the health crisis, earlier this year, or at the end of last year, you presented a chart showing the pace of vaccinations. Granted, we keep switching back and forth between vaccinations and lockdown restrictions. For the moment, however, the health crisis does not seem to have altered economic performances very much.

WILLIAM DE VIJLDER

I think we have reached one of those moments where we begin to “see the light at the end of the tunnel”. Companies seem to be increasingly certain that uncertainty will decline. In other words, in the very short term, we will continue to face very strict restrictions, which have even been intensified in some countries, like France. But at the same time, with the roll out of vaccination campaigns and effective lockdown measures, there is a feeling that we are nearing a tipping point: we are going to speak more and more about vaccinations and the number of people vaccinated, and less and less about the number of new cases.

Business leaders will begin to see that the glass is half full, and they will start to prepare for what comes next.

FRANÇOIS DOUX

And what comes next will be stimulated by the famous recovery plans that we have talked so much about in the advanced countries, both in the Eurozone and in the United States. As a result, uncertainty seems to be on the wane. I remember you once used a metaphor about a train. We are sitting in a train, heading towards recovery.

WILLIAM DE VIJLDER

The American train has clearly left the station, but we are not just in any old train, we are in a high-speed TGV train. This image of a TGV train also applies to the Eurozone recovery. For the moment, we are still sitting in the station, but we know that sooner or later, the train will begin moving.

We can more or less estimate when the train will leave the station. We can also be certain that as soon as it does, it will accelerate very rapidly, until it reaches a very fast cruising speed. I think that is what we can expect from the cyclical environment this year. For the moment, there is frustration over the number of new cases, new restrictive measures, and all. But at the same time, we know that things will get better, that the restrictions will be lifted and that the train will begin accelerating rapidly.

Looking forward, we foresee several quarters of growth that will largely surpass the long-term average.

FRANÇOIS DOUX

And yet, we must also pay attention to the possible formation of bottlenecks. We all saw how the blockage of the Suez Canal for a few days can have an enormous impact on international trade. But looking beyond this epiphenomenon, which did not last very long, there are other warning lights that could hamper the departure of our “recovery” train.

WILLIAM DE VIJLDER

Yes, that is a very pertinent remark. Indeed, we see all sorts of indicators. Numerous indicators show that things are going to get better in terms of growth and demand. But at the same time, we also see some warning lights, notably in terms of prices, such as input prices, which are rising the world over, at least wherever there are surveys. Prices are clearly rising rapidly. I think this is partly due to the profound disruption that we experienced in 2020, the supply-side disruption of the value chain.

For example, survey data on American companies shows that they have been facing a sharp rise in input prices. The more companies feel they are faced with such a situation, the more they say they intend to raise their own sales prices. The second half will be marked by an increasingly sharp focus on the dynamics of inflation, which could lead to some discomfort due to the bond market’s behaviour, which should lead to a gradual increase in long-term rates, even in the Eurozone.

FRANÇOIS DOUX

In other words, inflation is back, at least that is what the markets seem to be thinking. Thank you, William De Vijlder, for this update on the global economy. We will see you again soon on EcoTV. We will be back in a moment for the Chart of the Month with Stéphane Colliac. See you soon, William.

 

CHART OF THE MONTH

FRANÇOIS DOUX

In our Chart of the Month, we will now talk about Turkey. The good news is that Turkish growth returned to pre-crisis levels in 2020: up 1.8%. To tell us more, we are here with Stéphane Colliac.

FRANÇOIS DOUX

Hello Stéphane.

STÉPHANE COLLIAC

Hello.

FRANÇOIS DOUX

Let’s talk about inflation. This is what is most alarming about the Turkish economy today, despite the strength of GDP growth in 2020, up 1.8%. This chart shows Turkish inflation, which has clearly accelerated, to 15.6% year-on-year in February. It was already as high as 11.9% in October. First question: what are the underlying reasons for Turkey’s high inflation?

STÉPHANE COLLIAC

The main reason that inflation is accelerating is the depreciation of the Turkish lira last fall. In the January edition of Conjoncture specialising on Turkey, we calculated that a 10% depreciation of the Turkish lira would have a 2-point impact on inflation after three months. We are right in the midst of this timeframe, and that is exactly what is happening.

FRANÇOIS DOUX

There was also talk about the role of economic policy, right Stéphane?

STÉPHANE COLLIAC

Yes. It has clearly played a role in the lag between inflation trends and exchange rates, and a combination of the two. Indeed, there are some other imbalances, not just inflation. The current account deficit rose to 5.1% of GDP in 2020. And monetary policy has been rather accommodating. This was not true all year long. After a new central bank governor was appointed last November, he raised the key policy rate by 875 basis points. As a result, the Turkish lira stabilised.

FRANÇOIS DOUX

One last question. After another new governor was appointed recently, what are the prospects for the foreign exchange market in the months ahead, and its repercussions on inflation?

STÉPHANE COLLIAC

The currency has come under pressure again since 22 March, when a new governor was appointed to head the central bank. This raises fears of that growth and foreign exchange rates will return to a period of “stop and go”. There will be phases of monetary policy tightening, because there will be little other choice, followed by phases when monetary policy becomes much more accommodating, which implies a general depreciation of the currency. The result will be a kind of yo-yo movement for the economic, forex and inflation cycles.

FRANÇOIS DOUX

Stéphane Colliac, thank you for this update on the Turkish economy and inflation. We will be back in a moment with Three Questions for Helene Baudchon on the zombification of the economy.

 

3 QUESTIONS

FRANÇOIS DOUX

The Covid-19 shock and the risk of an accelerated zombification of the economy. This was the focus of the March edition of Conjoncture, written by five economists. Today, our guest is Hélène Baudchon. Hello Hélène.

HÉLÈNE BAUDCHON

Hello.

FRANÇOIS DOUX

Before going any further, could you explain what a zombie company is? How do you know one when you see it?

HÉLÈNE BAUDCHON

A zombie company is not very productive. It has high debt and low profitability, and yet it benefits from favourable financing conditions. Generally, it is a small company that has been operating for quite a few years. I say “generally”, because there is not a consensus definition of the term. That’s why it cannot be measured exactly, and why there is no consensus on the scope of the problem. There is a consensus, however, that zombie companies are making up an increasingly big share of the economy.

FRANÇOIS DOUX

So that is what we mean by a zombie company. Why is the situation so alarming today?

HÉLÈNE BAUDCHON

The expansion of zombie companies is alarming because of its negative impact on potential growth, by eroding productivity, corporate investment and employment. With the outbreak of the Covid-19 crisis, although it is still too early and difficult to jump to conclusions at this point, there are fears that the number of zombie companies is rising due not only to the impact of the crisis itself (on corporate liquidity and solvency) but also to the measures taken to buffer the shock and heal the scars. We face two big fears: a wave of bankruptcies, but also that there won’t be enough bankruptcies (which is the sign of zombification). We take a rather favourable view of the sharp decline in the number of bankruptcies in France, as shown in this chart. We think it illustrates the effectiveness of the emergency measures.

FRANÇOIS DOUX

Yet these emergency measures can also be seen as an accelerator of zombification?

HÉLÈNE BAUDCHON

Yes, for two key reasons. First, because a number of companies are mired in even greater debt following the crisis and the measures that were taken. This debt could prove to be excessive relative to the size of profits, which have also eroded with the crisis. Second, the emergency measures may have kept some non-viable companies afloat, unduly extending their lifespan.

FRANÇOIS DOUX

Yes, but wasn’t this indiscriminate, widespread support the right thing to do?

HÉLÈNE BAUDCHON

Yes, that is how we see it. Providing massive, indiscriminate support at the risk of fuelling a zombification movement seems preferable to more closely targeted support measure that leave creative destruction to do its job, but at the price of higher unemployment and at the risk of letting viable companies go under. In our eyes, the benefits of preserving human and productive capital are much higher than the risk of zombification.

FRANÇOIS DOUX

Before we conclude, Hélène Baudchon, let’s talk about the scope of zombification in the Eurozone. Which countries have been hit hardest? France, Germany, Italy, Spain?

HÉLÈNE BAUDCHON

As the chart shows, the percentage of zombie companies differs rather widely from one country to the next. It is lower in Germany and France, and higher in Italy and Spain. To summarize, these differences are largely due to the solidity of their banking systems and the smooth functioning of corporate laws for ailing companies.

FRANÇOIS DOUX

Last question. Are there any solutions? What can be done about these zombie companies?

HÉLÈNE BAUDCHON

First, we must strengthen the financial situation of companies, notably their equity capital. Improving bankruptcy laws and court-ordered liquidation procedures is another solution. We can also step up competition, innovation, training and professional retraining to improve the allocation or reallocation of resources. All in all, it is a matter of strengthening growth, because growth is the best way to curb zombification.

FRANÇOIS DOUX

Stronger growth. With that we conclude this edition of EcoTV. Thank you Hélène Baudchon. We will see you next month.

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