eco TV

The stop-go recovery

11/13/2020

After a mechanical and spectacular recovery in economic activity during the third quarter, there seems to be a real risk that the euro zone will see the recovery come to an abrupt halt in the final quarter of the year. This will be due to the sharp rise in the number of new coronavirus cases, the measures taken to restrict the spread of the disease and the general feeling of uncertainty that will hold back spending. This said, we can already look forward to the impetus to recovery from a relaxation of these measures once the number of new cases has been brought back under control. We are therefore living in a stop-start economy, with strong acceleration alternating with brutal slowdowns. Such an environment, with its lack of visibility beyond the short term, is depressing the propensity of businesses to invest. Households may also delay spending on large-ticket items. Monetary and, to an even greater extent, fiscal support will thus remain crucial. Spillover effects from the rest of the world will also play a key role. In this context, one thinks of China and of the USA, where a new stimulus package is being drawn up.

TRANSCRIPT // The stop-go recovery : 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.

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