eco TV
Outlook for the second semester: the tug of war between good fundamentals and rising uncertainties 6/11/2019

World economic fundamentals are rather strong. However uncertainty persists, notably in terms of geopolitics and international trade.

TRANSCRIPT // Outlook for the second semester: the tug of war between good fundamentals and rising uncertainties : June 2019

FOCUS

François Doux: Halfway through the year 2019, let’s get an update on the global economic cycle from our chief economist. Hello William De Vijlder

William De Vijlder: Hello François.

François Doux: William, today we’ll talk about fundamentals, headwinds and the central banks’ “eternal” monetary support.Let’s start with fundamentals. We have the figures for first-quarter 2019. What do they tell us.

William De Vijlder: The overall performance is rather reassuring. Growth beat expectations not only in the US, but also in China and Japan. The eurozone also outperformed, so everyone is relieved.

François Doux: That is reassuring after a somewhat turbulent year-end 2018.

William De Vijlder: Yes, the financial market volatility was extremely disconcerting. So these growth figures are reassuring. Yet we must also nuance our message somewhat: I don’t want to give the impression that I’m overly optimistic either.

François Doux: Why, are you seeing some cracks in these fundamentals?

William De Vijlder: That’s right. Fundamentals are still upbeat, but they are not quite as strong as they were 12 months ago. Which fundamentals? The job market, household income, corporate earnings growth and interest rates. In both the United States and Europe, they are still rather strong, but less so than in the year-earlier period.

François Doux: Looking towards the future, we are obviously confronted with uncertainty. That’s one word that comes up repeatedly in our interviews, William. Halfway through the year 2019, is uncertainty currently higher or lower?

William De Vijlder: Uncertainty is clearly playing a dominant role. In a sense, it is overshadowing the quality of fundamentals. It is important to keep this in mind. At the beginning of the year, for example, we had hoped that by now there would be less uncertainty over key economic areas, but the situation is still totally opaque.

François Doux: There is the geopolitical situation and trade tensions. What is your point of view?

William De Vijlder: Geopolitical tensions are very tight. Trade tensions, too. We were hoping the US and China could reach a trade agreement by now, but we are still far from it. We were hoping for some clarity over Brexit, too, but for the moment, anything is possible.

François Doux: In the automobile sector, we are still in the dark concerning EU and US relations.

William De Vijlder: This is a major issue. The European Commission has underscored its importance and its multiplier effect not only on the German economy, but also on Germany’s trading partners. The Americans announced that after analysis – was there a threat to safety? – they had not formed a clear-cut opinion on the subject yet, and simply postponed their decision to increase sector tariffs.

François Doux: To conclude, let’s talk about central bank support. It seems to be reflecting both high uncertainty and strong fundamentals.

William De Vijlder: That’s a good way to put it. We have been counting on central bank support for a long time, and this is bound to continue.

François Doux: At the Fed?

William De Vijlder: Yes. The Fed’s message is: “We are patient”. Why? Because inflation is not problematic. The Fed is also afraid of making a mistake, which has almost become an obsession. So it sends out a signal: “we will no longer raise key rates”. And the markets assume that means monetary easing.

François Doux: And in Europe, it’s the absence of inflation that is the big concern?

William De Vijlder: In Europe, that is the ECB’s main focus as it tries to spark higher inflation. The inertia of core inflation is very strong. To counter the headwinds in the EU and the eurozone, the ECB is saying it might reintroduce its famous targeted longer-term refinancing operations or TLTROs, to stimulate lending.

François Doux: We will keep an eye on lending. In conclusion William De Vijlder, what is the key to restoring peace?

William De Vijlder: Confidence. Too much uncertainty has undermined confidence. Say all you want about strong fundamentals, what counts in the end is that confidence is being trampled by uncertainty.

François Doux: Confidence on the part of all economic players.

William De Vijlder: That’s right.

François Doux: Thank you, William. We will talk again very soon about these cyclical issues. We will be back in a moment with our Chart of the Month on Poland, with Sylvain Bellefontaine.

 

 

View more videos Eco TV

On the Same Theme

Elevated uncertainty slows growth despite lower rates 9/6/2019
Business surveys in the US paint a diverging picture: manufacturing is worsening significantly but services have picked up nicely. Taking a broader perspective, evidence is building of a slowing economy. Less dynamic growth can be observed in engines of growth of the world economy: China and India, although reasons differ. In Europe, Germany is probably already in a technical recession whereas France is resilient. Central banks are back in easing mode but the effectiveness will be hampered by elevated uncertainty, despite the announcement of a new round of trade negotiations between the US and China.
Monetary easing at full employment: how effective? 7/12/2019
Fed Chairman Powell, in his address to Congress this week, has confirmed that easing is coming. In June, ECB President Draghi provided similar hints. This comes on the back of growing concerns regarding global growth and ultimately facing too low a level of inflation. Risks may be mounting, but, on the other hand, the unemployment rate is close to the natural rate. There are reasons to assume that monetary easing under full employment would be less effective than when the economy is marred in recession. Monetary easing could also raise concerns about financial stability, which, if unaddressed, could weigh on the ability of monetary policy to successfully boost inflation.
Growth concerns on the rise 7/10/2019
A sigh of relief followed the publication of first quarter GDP data. However since, growth concerns have picked up again on the back of a collection of new economic data but also — and perhaps more importantly — due to continued high uncertainty. The latter stems from concerns over the extent of the slowdown and its consequences in terms of economic risks. It also emanates from escalating tensions between the US and China over trade. The effects of this confrontation already show up in the Chinese data while in the US, mounting anecdotal evidence also point to its detrimental impact on business and the agricultural sector. The Federal Reserve has turned a corner and indicated that rate cuts are coming, much to the joy of the equity market. The ECB has also changed its message: with risks tilted to the downside and inflation going nowhere, it considers more easing is necessary.
Exogenous versus endogenous uncertainty and monetary policy 7/5/2019
 A high level of uncertainty can act as a drag on growth. Whether monetary easing will succeed in boosting growth will depend on the nature of uncertainty. Endogenous uncertainty follows from the normal development of the business cycle and rate cuts should succeed in reducing this uncertainty by boosting confidence of economic agents. Exogenous uncertainty is not driven by the business cycle but is triggered by other factors, such as, in the current environment, ongoing trade disputes. In this case, monetary policy effectiveness suffers and, despite rate cuts, the growth slowdown should continue until its root cause (exogenous uncertainty) is addressed.  
Uncertainty: persistently high 7/5/2019
High levels of uncertainty can have a profound impact on economic activity and financial markets. Our Pulse presents different metrics.
Climate change puts balance sheets at risk 6/28/2019
Climate change puts at risk the balance sheets of numerous actors, such as households, companies and the public sector. The first episode of this series of podcasts sets the general framework, William De Vijlder is going to remind us what a balance sheet is and how climate change can impact it. The second episode will focus on households and the third one on companies. In the fourth and last episode William De Vijlder will explain how climate change is impacting the balance sheet of the public sector.
Climate change: household balance sheets 6/28/2019
How does climate change impact the household balance sheet? Households’ assets and liabilities may be subject to climatic hazards. In many countries, this lesson was learned the hard way. That is why households should be aware of the environmental impact of the companies they choose to invest in or work for. In this second podcast’s episode, William De Vijlder emphasizes the particular importance of climate change in household finances.
Climate change and the governance of non-financial companies 6/28/2019
Climate change can impact business in many ways. We all know the effects of natural disasters, for example. But today, the views of users and consumers should be taken into account. So, climate change can not only affect infrastructure, production or sales but as well the very value of a company. Indeed, its valuation could drop because of climate risk exposure. That is why, William De Vijlder, in this third episode, recommends companies to include climate risk into their balance sheet management.
Climate change: public sector 6/28/2019
This last episode focuses on the impact of climate risk on the public sector balance sheet. How will states address the challenge of climate change? How will they manage the climate debt? Will they be able to implement the appropriate investment policies in a context of pressure on tax revenues? William De Vijlder exposes in this podcast the tremendous challenge faced by the public sector and the answers it is starting to provide.

ABOUT US Three teams of economists (OECD countries research, emerging economies and country risk, banking economics) make up BNP Paribas Economic Research Department.
This website presents their analyses.
The website contains 2202 articles and 553 videos