William De Vijlder

Group Chief Economist BNP Paribas

How to spend it? Vouchers versus VAT cuts

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Longue vue

Boomerang economics

Corporate sentiment has jumped following the easing of Covid-19 related restrictions. There is a risk of excessive enthusiasm because better business expectations do not tell us where we are in terms of the level of activity and demand. The current phase of the rebound is mechanical. It shows that the supply side starts to function again. The real question however is what happens to the demand side in the coming quarters. Companies and households are confronted with limited visibility, so caution will prevail.

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Stormy sky

The long shadow of unemployment

Recent economic data have improved on the back of the easing of lockdowns. This may create a feeling of false comfort. The effects of the severity of the crisis will make themselves felt well into the future. A key factor is the rise in unemployment and in unemployment expectations. Both weigh on household spending, due to related income losses and increased precautionary savings. The major national central banks of the Eurosystem expect unemployment to increase in 2021, despite the economic recovery. When visibility remains limited and the pressure on profits high, many companies have no other option than to reduce their labour force.

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Bilan - Illustration edito 20.23

European Union: corporate leverage as a headwind during the recovery

One of the longer-lasting consequences of this crisis is a forced increase in corporate gearing. A high level of corporate leverage can act as a drag on growth. Research shows that firms with higher leverage invest less than others. This reduces the effectiveness of monetary accommodation. Highly indebted companies may also suffer a lasting loss in competitiveness vis-à-vis their better capitalised competitors. It implies that policies aimed at recapitalising companies should have lasting favourable effects on growth.

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Uncertainty

Does forecast uncertainty matter? It depends

The publication by the ECB of different economic scenarios illustrates the extent of uncertainty which at present surrounds the forecasts for key macroeconomic variables. As a consequence, companies may hold off investing, preferring to wait for better visibility. While understandable at the micro level, such a wait-and-see attitude could act as a drag on growth and reinforce the view of companies that their caution was warranted.The large increase in the dispersion of earnings forecasts points to huge uncertainty at the individual company level. However this has not stopped the US equity market from rallying. Although several factors help to explain these different reactions to uncertainty, such dissension cannot last forever. At some point company cautiousness or investor bullishness will have to give in.

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European Commission

EU: after an ambitious proposal, preparing for difficult negotiations

The European Commission is proposing a comprehensive plan to support growth and achieve the EU ambitions in terms of climate policy and digital strategy. Such an effort is necessary in order to avoid that the current crisis would increase the economic divergence between member states. Such a development would weaken the functioning of the Single Market and weigh on long-term growth. The Commission proposes a combination of grants and loans at favourable terms, funded by debt issued directly by the EU. Given the resistance of certain countries to grants, negotiations on the proposal will be tough.

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Economy

The COVID-19 recession: this time is really different

Across time and countries, financial crises and, more broadly, recessions and recoveries, have had much in common. Recessions predominantly impact the demand side whereas the influence on the supply side is more limited. This time is different. The pandemic-induced recession will have a longer lasting influence on the allocation of household expenditures, if not on the level of spending.  More than a normal recession, it will also have major repercussions on the supply side, through changes in global value chains, working from home or the disruption of the economics of businesses which are confronted with a forced capacity reduction on social distancing grounds.

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Wall street

The COVID-19 pandemic and the US equity market

Fed Chair Powell’s comment about what would happen in case of a prolonged recession has weighed heavily on equity markets. Historically, recessions are accompanied by major equity market drawdowns. The year-to-date decline is more limited, which stands in stark contrast with the plunge of activity. Massive monetary and fiscal policy support has led to a reassessment of the distribution of risks, which goes a long way in explaining the rebound of equity markets. The focus is now shifting to the outlook for corporate earnings, hence the importance of the debate on the shape of the recovery.

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Eurozone: the many faces of proportionality in economic policy

Following the judgment of the German Constitutional Court on 5 May, the ECB Governing Council needs to demonstrate that the monetary policy objectives of its PSPP are not disproportionate to the economic and fiscal policy effects resulting from the programme. In most cases, monetary, economic and fiscal policies are mutually reinforcing. When assessing whether monetary policy is appropriate, one should take into account the stance of economic and fiscal policy. The necessity to have adequate transmission to all jurisdictions as well as the likelihood and extent of tail risks due to insufficient policy action also play a role in the assessment.

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Banière bank

Central bank balance sheet expansion: the sky is not the limit

Major central banks have stepped up their efforts to attenuate the economic impact of the pandemic, raising the question whether there is a limit to balance sheet expansion. An asset purchase program (QE) can continue for a long time, given the possibility to broaden the investable universe. Quite likely, asset price distortions and concern about the riskiness of the central bank balance sheet will act as the true constraint. For this reason, a central bank could decide to finance the budget deficit directly, considering that this should have a bigger growth impact for a given expansion of the balance sheet. The real challenge under such a strategy is to keep inflation under control once the output gap is closing.

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BCE

The EU response to the economic consequences of the pandemic: clear progress

Clear progress has been made at the European Council meeting this week. The proposals of the recent Eurogroup meeting on the creation of three safety nets have been endorsed. There is agreement to work on a recovery fund intended for the most affected sectors and geographical areas in Europe. Its financing would be linked with the multiannual financial framework. Importantly, Chancellor Merkel has declared that, in the spirit of solidarity, one should be prepared to temporarily pay a higher contribution to the European budget.

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Commerce international

The Covid-19 pandemic: stress testing the supply side

The COVID-19 pandemic shows that the supply side warrants greater attention when conducting macroeconomic analyses. Very long global value chains may be optimal from a cost and price perspective, but operationally may be very complex and, in particular, fragile. A more resilient supply side comes with a cost, both at the micro and macro level. Solving this trade-off in a market economy is difficult, which, to some degree, leaves a role for public policy.

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Covid-19

After the arduous Eurogroup agreement on pandemic relief, now for the difficult part

The Eurogroup has reached an agreement on bringing EUR 500 bn -4.2% of eurozone GDP- of additional firepower to attenuate the immediate economic impact of the Covid-19 pandemic. Three tools will be used: the SURE programme to temporarily support national safety nets, the EIB guaranteeing lending to companies -in particular SMEs- and a Pandemic Crisis Support via the ESM. The work on the creation of a Recovery Fund to boost European investments will continue. The difficult part will be to agree on its funding.

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Coronavirus

The COVID-19 pandemic and the labour market

In March, the employment component of the purchasing managers indices for the eurozone declined, whereas in the US, initial jobless claims skyrocketed. Companies need flexibility to manage their cost base but households suffering from an unemployment-related income loss would act as a headwind to the recovery. In the US, the Federal government will top up unemployment benefits, which vary from state to state. In Europe, short-time work schemes allow employers to adapt their workforce without having recourse to costly lay-offs.

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Covid_19

Drop in data confirms need for strong policy reaction

The measures to stop the spreading of the pandemic have a profound impact on the economy which increasingly shows up in the economic data.Record declines in business sentiment illustrate the necessity of the forceful policy measures which have already been taken.The lifting of the lockdowns will, mechanistically, trigger a rebound in activity but additional stimulus will probably be needed to maintain the momentum.

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Crise économique

Faced with a sudden stop, policy switches to a ‘whatever it takes’ mode

Recent activity and demand data for China show the huge impact of the coronavirus epidemic. German business expectations have seen an unprecedented monthly drop in March . The drop in the price of oil acts as an additional drag on growth and a source of increased credit risk. The strengthening of the dollar is a source of concern for issuers with foreign currency debt in dollar. Despite swift action of the major central banks and the announcement of increasingly important fiscal policy support in various countries, equity markets have barely reacted: lack of visibility dominates.

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Interview CNN du 9 mars

How will the coronavirus impact global growth

Richard Quest will ask William De Vijlder three main questions : How will the coronavirus affect global growth ? What have been the recent actions of central banks ? What governments should do in terms of fiscal policy ?

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Coronavirus + stock exchange

Addressing the economic consequences of the coronavirus: waiting for the fiscal policy impulse

Wall Street has entered a bear market, having declined more than 20% from its high. Equity markets globally have seen huge declines this week and corporate bond spreads have widened significantly.Despite the positive news from China, the combination of an uninterrupted international propagation of the coronavirus has dealt a blow to expectations about the growth outlook for the next several months. The oil shock has made matters worse.Central banks have reacted. After the Fed rate cut last week, the Bank of England cut rates as well and the ECB also took several measures to support activity.The instrument of choice at the present juncture is fiscal stimulus of a sufficient size. Both in the US and the eurozone, we are still waiting for this impulse.

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Coronavirus

The importance of monetary policy in addressing the economic consequences of the coronavirus

The Federal Reserve created a surprise this week by, quite unusually, going for an inter-meeting cut of the federal funds rate of 50 basis points. At first glance, the very nature of an epidemic makes monetary policy ill-equipped to address the consequences. The drop in demand and the disruption of supply are not related to the level of interest rates. Nevertheless, monetary policy has an important role to play in the current environment by seeking to avoid a deterioration of the financial and monetary conditions. This is a defensive move, the alternative being to run the risk that the tightening of these conditions acts as an additional brake on activity. It seems this has played a role in the decision of the FOMC and it now puts the onus on the ECB to act at its meeting next week.

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William De Vijlder

About William De Vijlder

Group Chief
Economist
BNP Paribas
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