William De Vijlder

Group Chief Economist BNP Paribas

Foreign versus domestic drivers of weaker sentiment

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vague

The risk of drowning in a wave of sentiment

Business confidence surveys play a key role in economic analysis. They measure the “waves of sentiment” on which economic players use to surf. But when will we reach the trough of the wave that just peaked about 12 months ago ?

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euro

Eurozone: what does weakening sentiment tell us about growth?

The European Commission now expects 1.3% growth for the eurozone this year, down from 1.9% in its previous forecast. This downward adjustment doesn’t come as a surprise, considering the declining trend of several survey indicators. The recent performance of these indicators in tracking GDP growth is mixed, which makes the assessment of the current growth momentum challenging.

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decision

US: Fed turning a corner, but into which direction?

Although US growth remains strong, global headwinds, softer survey data and tighter financial conditions have put the FOMC in risk management mode. Policy remains data dependent, but a patient stance will be adopted before deciding on the next move in monetary policy Inflation, which remains well under control, facilitates this wait-and-see attitude. Markets are now pricing in a policy easing in the course of 2020. More than anything else, this shows to which extent uncertainty has taken its toll on confidence.

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green finance

When environmental, trade and social policies meet

The recent “economists’ statement on carbon dividends” offers important policy prescriptions for the US to address global warming. It explicitly refers to the need for a border carbon adjustment system so as to maintain competitiveness versus countries that would not have introduced a carbon tax. The authors recommend that the carbon tax proceeds be equally distributed to US citizens It could be envisaged to use these proceeds in a way which takes into account the distributional aspects of environmental taxes whilst promoting energy efficiency investments.

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Brexit

United Kingdom: Brexit, the cost of uncertainty

Market reaction suggests that the parliamentary vote, with a wide majority, against the Brexit deal which had been negotiated with Europe, has reduced the likelihood of a no-deal Brexit. Whether this feeling of relief lasts will depend on how the discussions on possible outcomes evolve. The economic headwind which comes with this prolonged uncertainty, for the UK but also for the companies in the EU which trade with the UK, will not go away soon.

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Photo de William De Vijlder

Brexit: after the vote

As widely expected by markets and political commentators, Prime Minister’s May Brexit deal was defeated in parliament last Tuesday. She then survived a no confidence vote and has to present her plan B to parliament on Monday. The challenge is huge. Having lost with a wide margin would indicate that the Brexit deal needs more profound changes but Brussels has made it clear on many occasions that the deal is not up for negotiation. We’re in a situation of “more uncertainty for longer” with a negative impact on business confidence in the UK but also in the EU as a whole.

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crisis

United States: The Powell put

Fed chairman Powell has recently emphasized that the FOMC will be patient given the muted inflation reading and that it is ready to shift the policy stance swiftly if required. He also considers that financial markets are pricing in downside risks well ahead of the data. This means that they are too pessimistic on growth Professional forecasters’ estimates of the probability of entering into recession in the coming quarters do not display the typical pre-recession dynamics either.

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clouds

2019: growth outlook clouded by uncertainty

We started 2018 under a clear blue sky and finished the year under clouds of uncertainty. We started the year wondering how good it could get. After all, eurozone survey data showed an almost exuberant atmosphere. We finished the year wondering what could see sentiment make a turn for the better: when dovish guidance by the Federal Reserve at its December meeting causes a decline in Wall Street, it is clear that investors are in the grip of growth fears. In that environment, ebbing concerns about further rate hikes are of no avail. Sentiment tends to evolve gradually, which implies that at least in the early part of 2019, ‘uncertainty’ will be a frequently used word in describing the economic environment.

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United States: The big growth scare

The big correction of US equity markets since the end of September reflects increased investor concern about the growth outlook. The data for the 4th quarter nevertheless point towards ongoing sustained growth. Data released since the start of the year provide conflicting signals with a big decline in the ISM manufacturing index and a strong increase in non-farm payrolls. Uncertainty about US-Chinese trade remains a key factor weighing on business sentiment.

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Global economy: In the grip of growth fears

The new projections of the FOMC show a downward revision to growth in 2019, a slower pace of Fed tightening and a lower cyclical peak level of the federal funds rate. Lower bond yields, a weaker dollar and a global decline in equity markets show that investors are in the grip of a growth scare. This is also echoed in a survey of US CFOs but this is at odds with the outlook for the drivers of economic growth. Growth worries probably reflect a focus on tail risk (rather than on the mean forecast) which may be explained by rising uncertainty.

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ECB

ECB: From quantitative easing to quantitative pausing

As expected, the ECB Governing Council has decided to end the net purchases in the context of its asset purchase program. This new phase can be called quantitative pausing, before eventually moving to quantitative tightening, i.e. to shrink the size of the balance sheet. The end of net purchases increases the role of forward guidance as an instrument to control interest rate expectations. The enhanced forward guidance, i.e. continuing to reinvest for an extended period past the first rate hike, should be welcomed.

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oil

The decline of commodity prices: A matter of concern?

Oil and metals prices are down significantly this year. For oil this seems to be predominantly driven by supply factors. The decline of metal prices probably reflects the softening of global growth. There is a clear negative relationship between oil price changes and subsequent US real GDP growth. US growth is expected to face a number of headwinds in 2019 but the decline of the price of oil should act as a tailwind.

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Australian flag

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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William De Vijlder

About William De Vijlder

Group Chief Economist BNP Paribas
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