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.


Global: (un)avoidable uncertainty

Uncertainty has a big impact on the behaviour of households and companies. Unexpected events and their second round effects imply that to some extent it is unavoidable. Economic policy should avoid increasing it further. Whereas monetary policy aims to keep a lid on uncertainty, protectionist measures amplify it and can end up acting as a major headwind to growth.

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Germany: still relaxed about softer sentiment

German business climate indicators have eased since the start of the year, a movement which is broad-based. Very recently, some indicators have stabilised. Corporate uncertainty, as measured by the dispersion of the assessments of the economic outlook, has not increased yet despite concern about a trade war. However, dispersion tends to lag the overall evolution of the business climate so this indicator will need to be monitored closely in the coming months.

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The headwind of tariff uncertainty

Worries about tariff increases are a headwind to growth because of the uncertainty about the outcome and its timing. Global value chains complicate the analysis. Tariffs increase input prices in the importing country and weigh on order books in the exporting country. Since the start of the year, both input prices and export orders have weakened in many countries. It’s probably too early to look for a link with tariff measures and tariff uncertainty.

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Eurozone: domestic support, global risks

The ECB meeting account shows a central bank which is confident about the growth outlook despite the recent softness of data. The concerns relate to global factors which have become more prominent: the threat of trade protectionism. This concern is also echoed by the Federal Reserve.

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Emerging markets: a sudden chill

In recent years, emerging market issuers, in particular corporates, have raised huge amounts of USD debt, thereby increasing their sensitivity to an appreciation of the dollar. Rising US treasury yields, a sudden strengthening of the dollar and country-specific issues have triggered considerable portfolio outflows and a weakening of emerging currencies.

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Uncertainty and bad inflation risk on the rise

Markets have reacted in a calm way to the US decision to withdraw from the Iran nuclear deal. Despite the increase in geopolitical uncertainty, there has been no flight to safety and US treasury yields have followed oil higher. Should oil prices continue to increase, this would end up acting as a headwind to growth.

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Eurozone: softer sentiment, fundamentals still strong

Sentiment indicators have softened globally in recent months, including in the eurozone. The historical experience is varied although cyclical declines in eurozone sentiment have tended to last quite a number of months. Considering the current strong fundamentals, one would expect that weaker sentiment merely points to some moderation of growth.

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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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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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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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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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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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