William De Vijlder

Group Chief Economist BNP Paribas

The decline of commodity prices: A matter of concern?

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Australia: Recession, a distant memory

Australia has seen 27 years without a recession and IMF and OECD forecasts show ongoing growth in coming years. Population growth, productivity growth, commodity exports to China and other fast growing Asian economies have played an important role together with policy aimed at enhancing economic flexibility. The floating exchange rate has been an important countercyclical and hence stabilising factor. The housing boom has become a source of concern from a financial stability perspective with recent prudential measures allowing for a “positive correction”.

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resilience

Eurozone: Strengthening resilience

Support seems to be growing for the proposal of France and Germany for a eurozone budget. This would contribute to a much needed enhancement of economic resilience, that is the ability to cope with shocks. Resilience can also be strengthened through private and public risk sharing and policies seeking to boost potential growth. Boosting resilience is all the more important considering that risks to global growth seem to be tilted to the downside.

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William De Vijlder

The strange debate about central bank independence

Is central bank independence under threat? The question may seem strange. After all, central bank independence has been instrumental in bringing down inflation and inflation expectations in the 80s and 90s and monetary policy has been successful in bringing lasting recovery from the Great Recession.

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William De Vijlder

Bank of Japan: limits to QE?

The Bank of Japan introduced quantitative easing back in 2001 after having adopted a zero interest rate policy in 1999. Almost two decades later, inflation remains well below target despite a balance sheet which is now as big as Japan’s GDP

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Japon

Central banks: An effective upper bound to QE?

The balance sheet of the Bank of Japan is equivalent to the country’s GDP, yet inflation remains stubbornly low compared to the official target. Years of quantitative easing have caused distortions in equity markets and weighed on liquidity in the market for JGBs. Concerns would go well beyond Japan and cause doubts about the effectiveness of more QE.

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uncertainty

Eurozone: Cooler sentiment

Sentiment indicators continue their softening trend and the flash estimate points towards weak third quarter GDP growth. Yet drivers of final demand continue to point towards ongoing good growth in the upcoming quarters. Data in the coming weeks as well as developments concerning Brexit and US trade policy will be key to confirm or tune down this assessment.

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équilibre

Tipping points

US long-term rates rose sharply in early October, which brings to mind the sudden rise in early February. Upside surprises in terms of wages and inflation triggered February’s upturn, while the catalyst in early October was a strong rise in non-manufacturing ISM, an indicator that is usually not monitored very closely. That this indicator should have such a big impact already shows how nervous the markets are.

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US

Understanding the market’s volatility

In Wall Street stock market fell sharply again, pursuing a bearish trend initiated several weeks earlier. For an economic understanding of these trends, it is worth comparing equity market behaviour with that of the other asset classes, an exercise that is all the more difficult given that the correlation between asset classes tends to increase as pressures rise.

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media

Don’t mention the R word

People update their expectations more quickly when media coverage of a given economic topic becomes more intense. The change in the outlook is more important than today’s cyclical environment. Monitoring media coverage of economic slowdown risk will become particularly relevant against the background of a loss of momentum in survey data.

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Strengthening the eurozone: prospect of progress at last?

The German finance minister has made a plea for the creation of a pan-European unemployment fund. Being able to borrow from the fund would require having contributed in the past as well as having met certain criteria in terms of economic policy. This form of risk-sharing would soften the impact of downturns and hence would be an important contribution to strengthen the eurozone.

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Global economy

Softer growth amid increased uncertainty

Growth has eased during the course of this year with the US being the major exception largely thanks to fiscal stimulus. The ensuing cyclical desynchronization has caused a broad-based appreciation of the US dollar, in particular versus emerging currencies. In some cases (Argentina, Turkey), the depreciation has been considerable due to country-specific developments. Global growth should continue to ease further next year and lead to a certain resynchronization: the impact of the US fiscal boost will wane, Fed tightening should start to have an effect and corporate investment is expected to slow, which in turn should weigh on world trade growth. Even in the absence of additional tariff increases, fears of more tit-for-tat measures could sap business confidence.

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investor risk appetite

A sudden drop in risk appetite

The eruption of US equity market volatility, with global spillover effects, is a delayed reaction to a rather significant increase in bond yields since the second part of August. Market-implied inflation expectations didn’t move that much so the rise in long term rates reflects an increase in real yields which in turn is related to strong growth numbers. Historically the relationship between weekly changes in yields and stock market performance is weak. This implies that one should focus on drivers of investor risk appetite and in particular signs of slower growth.

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Federal Reserve

United States: Data-dependent discomfort

Recent indicators point towards ongoing strong US growth. The non-manufacturing ISM index has caused a jump in treasury yields: data-dependent forward guidance implies that investors expect the Fed will not remain passive when data are particularly strong. Growth outside the US is slowing yet higher US yields have been mimicked across the globe. The dollar has also strengthened which is unwelcome news for corporates in developing economies which carry a lot of debt in USD.

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Fed: the Phillips curve is flat

Fed chairman Jerome Powell made important comments during his press conference. Fiscal policy is on an unsustainable path and lasting widespread tariffs would be bad for the US and the world. Monetary policy remains accommodative and data-dependent. Markets liked the dovish bias in the message.

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lightning

Ten years after: The uncomfortable new normal

Ten years after the collapse of Lehman Brothers, assessing to what extent major economies have fully recovered from the ensuing global financial crisis and the Great Recession very much depends on the perspective which is chosen. A mixed picture emerges: in most countries per capita real GDP is higher than before the crisis. But public sector debt hasn’t declined and growth has been slow, despite the expansionary policy stance. Policy rates are still (very) low and central bank balance sheets are vastly bigger. Policy leeway hasn’t been restored which implies that thinking about how to address the next downturn should be high on the agenda.

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William De Vijlder

About William De Vijlder

Group Chief Economist BNP Paribas
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