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.

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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EcoTV Avril 2021

Spring is in the air

Economic statistics for the first part of this year are better than expected, including in Japan and the euro area. Moreover, this development is broadening in terms of sectors. Looking at business surveys, there is a growing feeling of beginning to “see the light at the end of the tunnel”.

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Illustration édito EcoP

Growing certainty that there will be less uncertainty

In many countries the number of new Covid-19 cases has begun rising again, forcing governments to maintain or tighten health restrictions. This is the case for the Eurozone, among others, where a true rebound in growth and demand has been postponed yet again. The timing of the recovery will depend essentially on the effectiveness of restrictive measures and the acceleration of vaccination campaigns, but also on spillovers effects with some of its trading partners whose economies are picking up more rapidly. The United States is one such country thanks to its successful vaccination campaign and the enormous recovery plan that has just been launched. America’s influence is not limited to providing greater opportunities for European exporters. The upturn in US bond yields has partially carried over to long-term rates in the Eurozone, pushing them higher. This trend largely reflects higher inflation expectations, although the Federal Reserve is convinced that the surge in inflation will be short-lived. Companies and households should welcome the bond markets’ jitters, which clearly signal the sentiment that the economy really is improving.

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After disconnecting, will money supply growth and inflation reconnect?

Since the Great Recession, the monetary base in several advanced economies has seen a considerable increase, driven by the creation of bank reserves at the central bank. Yet, contrary to what had been observed in previous decades, this has not been followed by a significant pick-up of inflation. Following the global financial crisis, the demand of the banking system for central bank reserves increased a lot. This was a reflection of the dire state of the economy and money markets as well as tighter liquidity requirements. Subsequently, quantitative easing caused an increase in reserves on the initiative of the central bank. Going forward, as the economy strengthens, money supply growth and inflation could reconnect on the back of an increase in money velocity or faster credit demand growth. Central banks have the tools to address this, if need be. Clearly, asset markets might be less relaxed about such a prospect.

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Inflation

US: nail-biting about the near-term inflation outlook

In recent months, purchasing managers in the euro area and the US have reported a significant increase in input prices as well as longer delivery lags. They reflect the next stage of the disruptive impact of the pandemic with supply struggling to meet the pick-up in demand. According to an Atlanta Fed survey, firms experiencing the most intense disruption tend to be those with the highest expectation of future inflation. It remains to be seen whether this will convince them to raise prices. The Federal Reserve is relaxed about this but, nevertheless, there will be lot of nail-biting in the second half of the year as US inflation data are released in an economy that should be able to close its output gap quickly.

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EcoTV

Towards a pick-up in euro area inflation after all?

Euro area headline inflation has been in negative territory for several months and core inflation is stuck at a very low level. Unemployment is expected to rise further before starting to decline, so wage increases should remain limited. Does this mean that inflation is bound to remain low for a long time? Not necessarily.

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Inflation

Eurozone inflation: more noise than signal

The preliminary estimation for euro area inflation surprised to the upside, with annual core inflation reaching 1.4% in January. Monthly inflation was negative however, at -0.5%. Due to the Covid-19 pandemic, inflation data have become very noisy and hence more difficult to interpret. Survey data show rising input prices and lengthening of delivery times, which could exert some upward pressure on inflation. These factors should dissipate during the course of the year. Given the economic slack, any lasting pick-up in inflation should be a very gradual process

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EcoTVW

Towards a delayed eurozone recovery?

With the pace of vaccination roll-out, new infections in many countries and the emergence of variants, there is a risk that restrictions may need to be kept in place. This would induce a delay in the recovery. In the sectors impacted by the restrictions, the difficult times would last longer and could lead to bigger damage. Finally, an international comparison of the recovery pace could have an impact on capital flows and the euro, given that the eurozone is lagging behind.

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EcoTV 7 janvier

What difference will the pace of vaccination make for the economy?

The introduction of vaccines will enable the global economy to make the shift from a stuttering recovery, shaped by a series of lockdowns and their relaxations, towards a steadier growth trend. A key factor will be the gradual reduction in uncertainty, which will encourage households to spend and businesses to invest. The quicker we reach collective immunity, the stronger this economic momentum will be.

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Illustration édito 20.47

Economic outlook: the narratives of 2020

Narratives –the stories people tell about events- may influence behaviour. In future years, several narratives may very well be used when looking back at economic developments in 2020. Big, unanticipated shocks do happen. In terms of monetary policy, a ‘whatever it takes’ attitude prevails. This also applies increasingly to fiscal policy. In terms of financial markets, the dominant attitude towards risky assets is to buy rather than to say ‘bye bye’. With Next Generation EU, the European Union has again demonstrated that, under pressure, it can make big leaps forward. Finally, attention to sustainable growth has become ubiquitous. Some of these narratives provide comfort but several also come with a warning.

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2021- Vaccin

After a most difficult year, cautiously hopeful for 2021

Until the very end, 2020 has been a difficult year, to say the least. However, there are reasons to be cautiously hopeful about the economy in 2021. Vaccination should reduce the uncertainty about the economic outlook. Ongoing fiscal and monetary support is also important. However, more than ever, caution is necessary in making forecasts. Reaching herd immunity may take longer than expected and some of the economic consequences of the pandemic may only manifest themselves over time.

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EcoTV du 16 décembre 2020

2020 economic review: agile responses to the Covid-19 shock

Covid-19 represents an exogenous shock to the global economy of unseen proportions in recent decades. The reaction has been swift and agile. Central banks have eased policy and injected liquidity whereas governments have put fiscal discipline aside and used their budgets to bring much-needed support. This has softened the blow from the pandemic. What has also played a role is the agility of companies by adapting their production and/or distribution models to cope with the disruption of supply chains and the impact of restrictions on sales and by making it possible for a lot of their staff to work from home. Most importantly, the development of a vaccine brings hope at the end of a very difficult and challenging year. Vaccination should lead to a lasting economic recovery although questions remain about the possible longer-lasting impact of the pandemic in terms of unemployment and corporate as well as public sector indebtedness.

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Incertitude

What if the road to Covid-19 immunity is longer than expected?

The prospect of the deployment of a Covid-19 vaccine has raised expectations that the stop-start cycle seen this year will make way for a lasting economic recovery in 2021. There is concern however that bringing the pandemic under control could take more time than is currently assumed in economic projections. Under such a scenario, worries about possible new restrictions would remain elevated, although one can assume that, because of vaccination, these measures would be less strict than before and more local.Nevertheless, in the more exposed sectors, investment and employment could be clear victims.

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Inflation

Pent-up demand to trigger inflation pick-up

The Covid-19 pandemic has caused a decline in inflation and, in most euro area countries, an increase in the inflation dispersion between sectors. It will take considerable time until activity has been restored sufficiently to generate labour market bottlenecks, which –in the absence of exogenous shocks- are a necessary condition to see a broad-based and lasting increase in inflation. This suggests that for the coming years, we should expect inflation to fluctuate around a slowly rising trend. In the course of 2021, the unleashing of pent-up demand –under the assumption that a vaccine is sufficiently widely deployed- could cause a temporary pick-up in inflation. In this respect, a decline in the price elasticity of demand will play a key role.

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Blog édito 20.42

Announcement of vaccine cuts tail risk

The announcement that a Covid-19 vaccine that is under development is highly effective caused major reactions in financial markets, reflecting a feeling that the growth outlook has changed. The prospect of a vaccine offers hope that in the medium run activity will normalise, but the positive impact on growth will take time to materialise. Clearly, the view that better times are ahead of us very much depends on the horizon one takes. However, decisions of households and businesses not only depend on expected growth of income and profits but also on the distribution around the growth forecast. The prospect of a vaccine reduces the probability of very negative outcomes and this reduction in uncertainty should eventually contribute to a pick-up in growth.

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Illustration blog EcoTV du 13/11/2020

The stop-go recovery

After a mechanical and spectacular recovery in economic activity during the third quarter, there seems to be a real risk that the euro zone will see the recovery come to an abrupt halt in the final quarter of the year. This will be due to the sharp rise in the number of new coronavirus cases, the measures taken to restrict the spread of the disease and the general feeling of uncertainty that will hold back spending. This said, we can already look forward to the impetus to recovery from a relaxation of these measures once the number of new cases has been brought back under control. We are therefore living in a stop-start economy, with strong acceleration alternating with brutal slowdowns. Such an environment, with its lack of visibility beyond the short term, is depressing the propensity of businesses to invest. Households may also delay spending on large-ticket items. Monetary and, to an even greater extent, fiscal support will thus remain crucial. Spillover effects from the rest of the world will also play a key role. In this context, one thinks of China and of the USA, where a new stimulus package is being drawn up.

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Crise + Covid 19

The stop-start recovery

Activity was already slowing before the new lockdown measures and the latter will act as an additional brake. We are living in a stop-start economy. The contraction of activity should be more limited than in March-April. The measures are less strict for economic activity, businesses are better prepared and exports should benefit from a more dynamic business environment, in particular in Asia, compared to what happened in spring. The stop-start recovery should also have negative consequences that go beyond the near term. Uncertainty may last for longer which entails increased risk of bigger scars like a rise in long-term unemployment or corporate bankruptcies. It may intensify disinflationary forces and increases the burden on public finances. It will also take more time until the pre-pandemic activity level will be reached.

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Dette

The stairway of public indebtedness

For a large sample of developed economies, government debt as a percentage of GDP has been on a rising trend over the past 40 years. High public sector debt weakens the resilience of the economy to cope with interest rate and growth shocks.This calls for embarking, at some point in time, on a fiscal consolidation. Clearly, now is not the time. The economy is still recovering from the Covid-19 shock and the outlook remains highly uncertain. Nor is there any urgency, considering the very low interest rates. However, the absence of urgency in the near term should not make us forget about the necessity to act at a later stage. Otherwise, the resilience of the economy would weaken further. It would also represent a bet that in every downturn, central bank QE will come to the rescue.

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