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Despite its rebound, economy needs monetary and fiscal support

9/10/2020

The stock market performance of technology companies is a reminder that the Covid-19 pandemic will force companies to accelerate the adoption of new technologies to manage their cost base and to remain competitive. The increase in share prices also reflects, amongst other things, an expectation of a strong rebound in third quarter growth. Coming after the huge drop in activity in the second quarter, this may create an impression that everything is fine now. Such a conclusion would clearly be premature. Uncertainty remains pervasive, in terms of the health risk but also as far as the labour market and the financial situation of many companies are concerned. Against this background, there is an obvious necessity of ongoing monetary and fiscal policy support.

TRANSCRIPT // Despite its rebound, economy needs monetary and fiscal support : September 2020

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.

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