William De Vijlder

Group Chief Economist BNP Paribas

Economic cycle

How are growth, inflation and employment trends evolving in a given country or region? William De Vijlder examines the cyclical fluctuations of an economy in crisis, expansion, recession and recovery phases as part of a cyclical analysis.

graphique economie

Sentiment measures offer mixed picture

The latest survey data show a very mixed picture. In the manufacturing sector, China saw some signs of stabilisation, whereas Japan experienced a deterioration. In Germany, manufacturing remains under pressure. The picture in the eurozone is quite diverse, depending on the country and the sector.Looking at the broadest survey indicator for the eurozone, one observes a stabilisation. Whether this will be confirmed depends to a large degree on developments in China and on the well-known sources of uncertainty (trade, Brexit).

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chinese dragoon

Europe: China exposure and export sentiment

Considering its considerable weight in world GDP, slower growth in China causes spillover effects. Over the past 12 months, countries which are more exposed to China in terms of exports have seen a bigger drop in their new export order assessment. In Germany there is a close correlation between the Chinese purchasing managers index and the assessment of exports in the PMI. This shows that Germany and, by extension, Europe as a whole should hope that recent Chinese growth support measures will be successful.

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global trade

Foreign versus domestic drivers of weaker sentiment

Since early 2018, based on the purchasing manager indices, a large number of countries have witnessed a decline in the assessment of new export orders which was bigger than the decline of the general climate in manufacturing. This suggests a dominance of foreign demand shocks, rather than domestic shocks, in explaining slower overall growth. The drop in new export orders echoes the significant slowdown in world trade growth. This is probably related to slower Chinese growth and, in many countries, slower growth in capital expenditures, which have a higher import content than consumption. Trade-related uncertainty may also play a role.

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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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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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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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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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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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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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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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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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