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.

Vitesse croissance

Growth hits speed limit

Judging by recent survey data, it seems many advanced economies are hitting against their speed limit in terms of economic growth. This has several consequences. It creates upside risks to inflation, something which is acknowledged by the Federal Reserve and the ECB. Labour shortages can cause faster wage growth but they should also underpin consumer confidence and spending. Supply bottlenecks should boost company investments. However, when growth is at the speed limit, future economic volatility may increase. Finally, it also creates an analytical challenge in understanding whether softer business surveys are demand or supply driven.

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US inflation: increasing discomfort

Annual inflation has reached 5.3% in the US in June. Its drivers are still very concentrated but there is concern that they will spread. Anecdotal evidence is accumulating that price pressures faced by companies are increasing. Price pressures as reported in the ISM survey send the same signal. Historically, they have been highly correlated with producer price inflation and consumer price inflation but the transmission depends on factors such as pricing power, competitive position, labour market bottlenecks, etc. The next several months will be crucial for the Federal Reserve and for financial markets, considering the Fed’s conviction that the inflation increase should be temporary. The bond market has bought into this view thus far but, going forward, its sensitivity to upside surprises to inflation should be higher than normal.

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Loading 2021

A global macro economic analysis after 18 months of pandemic

A conjunction of developments has led in the first semester of the 2021 to a global improvement in business and consumer sentiment in advanced economies. Vaccination campaigns gathered speed while the number of new infections declined. Monetary policy support also played a part as well as fiscal policy. International trade and capital flows created international spillover effects which led to a sizeable improvement in the assessment of export orders.

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William De Vijlder

Outlook for the second half of the year: it’s not over

A combination of positive developments has led in the first half of the year to a broad-based improvement in business and consumer sentiment in advanced economies: successful vaccination campaigns, a declining number of new infections, ongoing policy support and positive international spillover effects. Gradually, the ‘mechanical’ recovery in sectors which previously had suffered from restrictions is expected to lose steam. Supply bottlenecks and certain price increases may end up acting as a headwind. The growth cycle, despite a gradual slowdown, is far from over but neither is the fight against Covid-19. There is increasing concern that new variants would lead to precautionary behaviour, thereby weighing on certain spending categories. This concern has already triggered a significant decline in bond yields, despite concerns that in the US inflation might stay higher for longer. It also means that central bank policy guidance will be a key point of attention in the second half of the year.

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Looking beyond peak growth

The first half of the year has seen a broad-based improvement in business and consumer sentiment in advanced economies but elevated levels of business surveys reduce the likelihood of further significant increases. The third quarter is expected to see the peak in quarter-over-quarter GDP growth this year. Nevertheless, over the remainder of the forecast horizon –which runs until the end of next year- quarterly growth is expected to stay above potential. This favourable outlook for the real economy brings challenges for financial markets. Surprising to the upside in terms of earnings will become more difficult. Moreover, there is the question of the inflation outlook. For the time being, both the Federal Reserve and markets are relaxed about it but we should expect that over the coming months, the market sensitivity to growth and inflation data will be higher than normal in view of what they would imply for the Fed’s policy stance.

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Economic Growth

Eurozone: unemployment, consumer confidence and household spending

The labour market should play a crucial role in the recovery through its impact on household income and spending. There are reasons to be hopeful considering that recent business surveys show a further increase in hiring intentions whereas unemployment expectations of households have dropped below their pre-pandemic level. Household intentions to make major purchases over the next 12 months have already increased and this trend should continue on the back of an improved financial situation and reduced income uncertainty.

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ITW Bloomberg 28 June 2021

Delta variant and economic growth

William de Vijlder, BNP Paribas Chief Economis is interviewed by Anna Edwards and Mark Cudmore on “Bloomberg Markets: European Open” and discusses the delta variant issue and the outlook for economic growth.

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Stagflation

The (unwarranted) stagflation narrative of 2021

Strong US and Eurozone GDP growth in the second and third quarters should be followed by a gradual slowdown. Due to the ‘acquis de croissance’ going into the fourth quarter, the perceived slowdown versus the third quarter could be much bigger than what shows up in the current forecasts. In the US, the current elevated inflation will take time to decline. In conjunction with slowing growth, this could boost the stagflation narrative. Such a depiction of the economic environment seems unwarranted however, considering that inflation should decline further in the first half of next year and that the US economy should continue to grow above potential.  

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EcoTVWeek du 25/06

Is there a risk of stagflation? 

The 1970s have gone down in history as an era of stagflation, defined as a period of slow or even negative output growth and inflation that is high by historical standards. Two supply shocks in the oil market are considered as a key cause but other factors also played a role. In the course of this year, the lifting of restrictions related to Covid-19 has caused an imbalance between supply and demand, leading to a significant pickup in inflation. There is concern that growth, after being particularly strong, will slow, whereas inflation might stay elevated for longer. This has given rise to comments that stagflation, albeit in a lighter version, could make a comeback. However, this risk seems limited.

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Engrenages/inflation

Inflation higher for longer? The interplay between productivity, profit margins and pricing power

A complex interplay between unit labour costs, profit margins and pricing power will determine whether the current increase in inflation will be longer-lasting. Traditionally, in the early phase of a recovery, unit labour costs decline on the back of increased productivity. This should cushion the impact of higher input prices on profit margins. Subsequently, unit labour costs should increase but this does not imply that margins should decline. Given the strength of the growth acceleration, the fact that alternatives for meeting robust demand often do not exist and that going for market share makes no sense when faced with supply constraints, the conditions seem to be met for a rather significant transmission of higher input prices in producer output prices.

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Zone euro

Eurozone: peak growth momentum => peak in bond yields?

Historically, a very close correlation has been observed between cyclical peaks in German economic sentiment –which since the start of the euro more or less coincides with the peak in Eurozone economic sentiment- and the 10 year Bund yield. The latter tends to decline, once the peak in sentiment has been passed. Although other factors also play a role in the dynamics of long-term interest rates, the historical experience is important to keep in mind when assessing the outlook for bond yields.

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william De Vijlder

Eurozone: a potential for a positive surprise in the labour market

The pandemic has caused significant job losses although government support measures have limited the rise in the unemployment rate. A further increase is expected for this year but recent survey data suggest there is a potential for positive surprises in terms of labour market developments: hiring intentions by companies are on the rise.

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Inflation

Uncomfortable inflation

Usually during recovery phases following a recession, it takes quite some time before inflationary pressures begin to appear. Yet the 2020 recession was atypical, and the recovery is proving to be just as unusual. Growth should receive abnormally strong support in the quarters ahead. What if price acceleration was not temporary, contrary to the reassuring comments of the Fed’s monetary policy committee members?

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Illustration Blog 21.20

Supply bottlenecks and the inflation outlook

In countries where restrictions on mobility are lifted, demand picks up suddenly, causing an imbalance with supply, which takes more time to react, in particular when value chains are long and complex. In recent months, companies have been reporting longer delivery lags and rising input costs, but the historical experience in the US and the euro area shows that the impact on inflation should be temporary and limited. Nevertheless, in bond markets, break-even inflation has increased significantly in recent months, reflecting investor worries about the risk of upside surprises to inflation. Should supply-side pressures ease in coming months, one would expect break-even inflation to decline as well.

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Illustration EcoTV mai 2021

US: back to the seventies?

In the debate on economic policy in the United States, some observers warn we may be back to the seventies. It was a period of severe shocks – move to floating exchange rates, two major oil crises –, high and accelerating inflation and an increased role for the State.

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Inflation

US: which insights from the ‘great inflation’ of the 1970s?

The ‘great inflation’ of the 1970s had many causes. The policy objective of full employment had already led to high inflation by the end of the 1960s. Two oil shocks and the depreciation of the dollar caused additional increases. The key factor was monetary policy, which was not adapted to the circumstances. It reflected the view that the Fed did not have a mandate to tolerate the sizeable increase in unemployment that might have ensued from the aggressive tightening needed to bring inflation under control. In addition, inflation was considered to be a cost-push phenomenon that could be addressed with wage and price controls. Today’s situation is very different. The Federal Reserve is an independent central bank and inflation expectations are well-anchored. However, letting the economy run hot is reminiscent of the 1960s.  Should inflation be above target for too long, the Federal Reserve will need to have the courage to tighten policy sufficiently despite the potential cost to the economy.

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Illustration ITW Brexit BNPP Fortis

Brexit and its economic aftermath

How does doing trade with the United Kingdom look like in a post-Brexit world? A few months after the Trade and Cooperation Agreement between the EU and the UK came into force on 1 January 2021, what is its impact on companies trade and the economy as a whole? What can Belgian corporates with interests in the UK expect in the future? My colleague Simon Gates and myself are sharing our insights in this video.

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Dépenses ménages

How to spend it? Shifting consumption patterns and Covid-19

The Covid-19 pandemic is having a profound impact on household expenditures. The volume has dropped and its composition has changed significantly. As restrictions are gradually lifted, services such as recreation, food services and accommodation, which have seen a big reduction in demand due to the restrictive measures, could thrive, to the detriment –at least relatively speaking- of spending on goods. For the strength of the early phases of the recovery, pent-up demand is an important factor. It plays a smaller role in the services sector, which could mean that countries with a larger services sector not only have suffered more from restrictive measures but could also face a bigger challenge during the recovery.

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