William De Vijlder

Group Chief Economist BNP Paribas

Eurozone: pockets of animal spirits?

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consumption

Eurozone: a peak in consumer confidence?

Turning points in the assessment of making major purchases lead those of the overall consumer confidence indicator.The difference of how top and bottom quartile income households assess their spending on major purchases is highly cyclical and its turning points lead those of consumer confidence. Based on recent observations, this suggests that the cyclical peak in consumer confidence is near.

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Eurozone: pent-up consumption, sign of hope or concern?

In most eurozone countries, durable goods consumption in relation to income is still below the previous cyclical peak
Consumer confidence tends to be higher than the previous peak. This combination suggests there is pent-up consumer demand but it could also reflect lingering households’ concerns about the lasting nature of the current robust growth.

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investissement en zone euro

Eurozone: pent-up corporate investment demand?

Eurozone business investment in relation to GDP is still below the previous cyclical peak but the difference is small, implying that the argument of pent-up demand isn’t that strong. However, the picture varies a lot depending on the country. In most countries, including the big four, the business climate is above the level registered at the end of 2007. This means that the investment/GDP ratio still has upside potential provided that confidence is translated into spending.

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choices and decisions

US: FOMC (a)symmetries

The FOMC has an asymmetrical loss function: avoiding a recession is more important than avoiding the risk of overheating. With this comes the necessity of a symmetrical inflation objective: a temporary overshooting is acceptable. Given the unclear relationship between unemployment and inflation, the Fed’s tone remains cautious despite upbeat growth projections.

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labyrinthe

Into the maze of trade disputes

The IMF and the OECD have expressed concern about rising trade tensions. At the macro level, tariffs create a lose-lose situation but the sector impact varies a lot. Beyond the direct economic effect, the impact on inflation and financial markets should also be taken into account. The biggest concern is the headwind coming from a structural increase in uncertainty.

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infographics-equity-market-economy

Infographics – Equity market corrections and the economy

At a given moment during the month of February, the S&P500 was down 10% from its historical high. Using the commonly used definition, this meant it was in correction territory. This was considered by some as a healthy correction whereas others argued it might very well mark the beginning of an era of structurally higher volatility. Econometric research and model-based simulations show that the economic impact of equity market corrections is rather small. The stylised facts however show the key role of the reciprocal influence between equity markets and growth expectations. In this respect, particular attention should be devoted to the evolution of the corporate bond spread.

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ECB by night

ECB: predictable projections create dovish bias

Core inflation projections by the ECB have followed a surprisingly predictable path. Starting at close to but below 2% for long horizons, they decline as the remaining horizon shortens. The big difference between the projections at long horizons and the eventual outcome implies they provide little information to the market: they simple confirm the ECB’s objective. They can also introduce a dovish policy bias.

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The uncomfortable normalisation of US inflation

February risks going down in history as the beginning of a new era marked by Wall Street’s correction. The central banks should be relieved by this “mission accomplished” but some discomfort is likely to be felt by the financial markets, which fear that more restrictive than expected monetary policies.

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US: playing with privilege

Fiscal reflation in a full employment economy makes it very likely that the US current account deficit will increase alongside the budget deficit. Despite rising bond yields, fuelled by the prospect of increasing budget deficits and monetary tightening, the dollar has weakened.

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US: inflation unease

After the upside surprise to hourly wages earlier this month, the consumer and producer price inflation numbers have also come in higher than expected. Anticipating inflation dynamics has become very difficult, as the Phillips curve has become less apparent. This forces investors and policy makers to pay more attention to recent data than to long-term relationships.

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United States: Somnolent risk wakes up

During the current business cycle, rising bond yields have been accompanied by rising equity prices. From a historical perspective, the rise in equities in recent months has been abnormally strong, probably helped by the prospect of corporate tax cuts. Market developments this week show a high sensitivity to economic surprises which may end up fuelling economic uncertainty.

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EcoTV Week – 02/09/2018: Upwardly mobile forecasts

The recently released winter forecasts of the European Commission express confidence that solid growth will continue. The expansion is broad-based and has become self-reinforcing. Labour market slack implies that growth should continue to grow well above potential but increasing shortages in specific areas are expected to eventually act as a speed limit leading to a moderation in growth.

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US rates and emerging markets – no spillover yet

Historically, a rising rate environment in the US has been a matter of concern for developing economies. It seems that this time is different: despite rising US yields, emerging market currencies have strengthened. This has contributed to a weakening of the effective exchange rate of the dollar and an easing of financial conditions in the US.

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EcoTV Week – 02/02/2018: Three perspectives on US economic policy

The combination of tax cuts and a still accommodative monetary policy should be very supportive for growth in the short run, all the more so given the easing of financial conditions (rise in equity market, weakening of the dollar). The longer run perspective is more sobering: limited potential to cut policy rates and a reduction of the fiscal policy space. Addressing growth slowdowns will be more challenging than ever.

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William De Vijlder

About William De Vijlder

Group Chief Economist BNP Paribas
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