William De Vijlder

Beyond the question of who will be the next Eurogroup President, another question arises : how will the eurozone handle next recession ? Fiscal policy is key in that matter.

The recession of 2020 is unique in nature and, in recent history, in depth. It should be followed by an equally unique recovery. The first phase should be particularly strong and driven by the easing of lockdown measures. Thereafter, growth should be essentially demand-driven. The lockdown-induced drop in demand led to forced savings. Tapping into these excess savings should provide a considerable boost to consumption. However, a significant deterioration in the employment outlook would mean that the forced savings during the lockdown would morph into precautionary savings, implying growth disappointments and a negative feedback loop.

Geert Lippens, CEO BNP Paribas The Netherlands and William de Vijlder, Group Chief Economist of BNP Paribas, discuss the V,U or W shape, balance sheet repair, zombification of companies, what changes might last, what changes might be temporary, how to read the macro and geopolitical signs, about kicking the can down the road in Europe and how COVID-19 might help to accelerate BNP Paribas’s mission for a sustainable future.

The bleak outlook for the labour market implies there is a strong case for measures to boost consumer spending in order to keep the recovery on track. A host of instruments can be considered: vouchers, VAT rate cuts, income tax cuts, tax credits, negative income taxes. Amongst these, a voucher programme offers many advantages given the possibility for fine-tuning the target group, the final beneficiaries, the type of spending and the regional dimension. However, it comes with considerable administrative costs.

Corporate sentiment has jumped following the easing of Covid-19 related restrictions. There is a risk of excessive enthusiasm because better business expectations do not tell us where we are in terms of the level of activity and demand. The current phase of the rebound is mechanical. It shows that the supply side starts to function again. The real question however is what happens to the demand side in the coming quarters. Companies and households are confronted with limited visibility, so caution will prevail.

Recent economic data have improved on the back of the easing of lockdowns. This may create a feeling of false comfort. The effects of the severity of the crisis will make themselves felt well into the future. A key factor is the rise in unemployment and in unemployment expectations. Both weigh on household spending, due to related income losses and increased precautionary savings. The major national central banks of the Eurosystem expect unemployment to increase in 2021, despite the economic recovery. When visibility remains limited and the pressure on profits high, many companies have no other option than to reduce their labour force.

One of the longer-lasting consequences of this crisis is a forced increase in corporate gearing. A high level of corporate leverage can act as a drag on growth. Research shows that firms with higher leverage invest less than others. This reduces the effectiveness of monetary accommodation. Highly indebted companies may also suffer a lasting loss in competitiveness vis-à-vis their better capitalised competitors. It implies that policies aimed at recapitalising companies should have lasting favourable effects on growth.

The European Commission is proposing a comprehensive plan to support growth and achieve the EU ambitions in terms of climate policy and digital strategy. Such an effort is necessary in order to avoid that the current crisis would increase the economic divergence between member states. Such a development would weaken the functioning of the Single Market and weigh on long-term growth. The Commission proposes a combination of grants and loans at favourable terms, funded by debt issued directly by the EU. Given the resistance of certain countries to grants, negotiations on the proposal will be tough.

The recession has been ‘mechanical’. With the progressive easing of the lockdown measures, we can expect a mechanical rebound of activity and demand. The key question is what happens afterwards?

Across time and countries, financial crises and, more broadly, recessions and recoveries, have had much in common. Recessions predominantly impact the demand side whereas the influence on the supply side is more limited. This time is different. The pandemic-induced recession will have a longer lasting influence on the allocation of household expenditures, if not on the level of spending.  More than a normal recession, it will also have major repercussions on the supply side, through changes in global value chains, working from home or the disruption of the economics of businesses which are confronted with a forced capacity reduction on social distancing grounds.

The COVID-19 pandemic shows that the supply side warrants greater attention when conducting macroeconomic analyses. Very long global value chains may be optimal from a cost and price perspective, but operationally may be very complex and, in particular, fragile. A more resilient supply side comes with a cost, both at the micro and macro level. Solving this trade-off in a market economy is difficult, which, to some degree, leaves a role for public policy.

William De Vijlder, Chief Economist at BNPP Paribas answers questions relating to the COVID-19 effects on the world economy. Are the US and Europe reacting in the same way. What are European and US central banks’ positions ? What will be the consequences of the fall in oil prices in the U.S. and the rest of the world?

In March, the employment component of the purchasing managers indices for the eurozone declined, whereas in the US, initial jobless claims skyrocketed. Companies need flexibility to manage their cost base but households suffering from an unemployment-related income loss would act as a headwind to the recovery. In the US, the Federal government will top up unemployment benefits, which vary from state to state. In Europe, short-time work schemes allow employers to adapt their workforce without having recourse to costly lay-offs.

The measures to stop the spreading of the pandemic have a profound impact on the economy which increasingly shows up in the economic data.Record declines in business sentiment illustrate the necessity of the forceful policy measures which have already been taken.The lifting of the lockdowns will, mechanistically, trigger a rebound in activity but additional stimulus will probably be needed to maintain the momentum.

William De Vijlder, chief economist for BNP Paribas, discusses how the coronavirus outbreak is affecting the global economy, financial markets and policies. He speaks with Matt Miller on “Bloomberg Markets: European Open.”

Richard Quest will ask William De Vijlder three main questions : How will the coronavirus affect global growth ? What have been the recent actions of central banks ? What governments should do in terms of fiscal policy ?

The international propagation of the coronavirus forces a rethink of the consequences for the global economy. Coming after the outbreak in China, the marginal impact on the global economy of the spreading of the epidemic should, a priori, be rather limited. Yet, financial markets have reacted very negatively. This jump in risk aversion reflects concern that the economic consequences may have been underestimated thus far as well as increased focus on tail risk. This ‘financial accelerator’ phenomenon may in turn contribute to the worsening of the growth outlook.

Putting a number on the consequences of the coronavirus is a huge challenge. On some of the topics we have a satisfactory level of visibility of the order of magnitude: international spillover effects of the demand shock, repercussions of the global increase in uncertainty. The visibility is much lower concerning the effects of the supply disruption. This is even more the case for the impact on China. In the near term, data surprises –the difference between the consensus forecast and the outcome- should be higher than normal. However, provided that the peak of the epidemic is reached quickly, visibility should improve quickly and hence support confidence.