William De Vijlder

EcoTV: Three key factors have characterised the summer months: more signs of slower global growth, more uncertainty and the promise of monetary easing to come. Based on the recent news flow, these themes will in all likelihood continue to dominate the remainder of the year.

Transcript :

François DOUX

As the 2019 summer holidays come to a close, we would like to make an update on the global economy. William De Vijlder, hello.

William De Vijlder

Hello François.

François DOUX

In your opinion, what was the key event in summer 2019?

William De Vijlder

The very sharp drop in long-term rates clearly comes to mind, not only in the United States but also in Europe. German rates, for example, have fallen to -70 basis points.

François DOUX

How do you explain the decline in long-term rates?

William De Vijlder

Economic numbers obviously played a role. We have seen the continuation of the slowing trend that has been observed over the past several months, and which is showing no signs of relenting. In China, several figures suggest that the economy is faltering. In addition, the Chinese authorities seem to be less in a hurry to take comprehensive measures to stimulate growth.

This ongoing slowdown can also be seen in Europe, where the manufacturing sector is under intense pressure. Exports have been squeezed and we should keep a close eye on the situation in the services sector.

There are also sharp divergences between Germany and France. The German economy is stalling – the Bundesbank predicts the country will enter recession in the third quarter – while France is very resilient.

François DOUX

A very resilient France. And what about the United States, William?

William De Vijlder

As the chart shows, generally speaking US statistics have been rather satisfying.

This is a rather nuanced statement, but this is important. Let’s look at this green line, which shows the nowcast of the Federal Reserve Bank of Atlanta.

This shows the real-time growth estimates, based on recent data releases.

First of all, we can see that these estimates have fluctuated within a rather narrow band during the month of August. The nowcast for Q3 growth has tended to improve slightly.

François DOUX

Yet if there is growth, isn’t this at odds with the drop in long-term rates?

William De Vijlder

Yes, it is rather striking. The green line shows that growth estimates are trending slightly upwards, but long-term rates have dropped off sharply. Two factors are at work. First, uncertainty is very strong. In early August, Mr. Trump declared, or should I say announced, that he still wanted to raise tariffs on Chinese goods.

François DOUX

So world trade and the battle between the United States and China is the real issue underlying our economy and our times. What is the other factor reducing long-term rates?

William De Vijlder

The other factor is clearly the central bank’s guidance. At the end of July, the Federal Reserve accompanied its decision to lower key rates with a very clear message: more monetary easing measures were still to come, that is further rate cuts. The European Central Bank (ECB) has already lined up a series of measures that it intends to adopt at its 12 September meeting. All in all, the market has been strongly influenced by the central bank’s message of lower interest rates.

François DOUX

We will talk more about the eurozone in just a moment with Frédérique Cerisier, notably on how much fiscal manoeuvring room there is now that the ECB has promised to stimulate growth.

One last question. Has calm been restored?

William De Vijlder

Not really. We live in a time that moves to the beat of tweets. Not so long ago, when economists arrived at their desk in the morning, they would look to see which economic statistics would be released during the day. Today, we are in the uncomfortable position of looking to see whether any major tweets have been released that could distort our image of the world. It is a real problem that makes life much harder for forecasters, financial market operators, and of course, companies in general, who must make key decisions on whether or not to invest or hire.

François DOUX

The immediacy of communications. That’s an interesting subject. Maybe we could do a podcast on it one day.

William De Vijlder

Yes, with pleasure.

François DOUX

Thank you, William De Vijlder, for this update on the global economy. We will be back in a moment with Frédérique Cerisier and the Chart of the Month, which looks at the eurozone’s fiscal manoeuvring room.