Bloomberg Interview 20200929Matthew Miller, presenter: William, what’s your take on the fire power that the ECB even has? If they wanted to do something, could they really move the needle on growth and inflation?

William De Vijlder, Chief Economist, BNP Paribas: Well, that is the key question. You can put more money at work, increase the size of your balance sheet further, but it’s really a matter of how there is the transmission to the economy and then to inflation going to work. I think that we’re in a situation that fiscal policy is absolutely crucial, that means that the efforts of various countries, think of Germany, France, and also other countries before that is going to be helpful, but it will take several years before we have inflation even converging a tiny bit towards the target and that’s the headache of the ECB.

Anna Edwards, presenter: That is the headache of the ECB. Good morning to you, William. What can get inflation back to where it needs to be, back to where the Central Bank target is to be, because it was hard enough to create inflation when we weren’t dealing with a global pandemic and we had unemployment rates much lower. Now, we have higher unemployment or maybe that’s still to come and we also have a global pandemic to deal with. How on earth do we get inflation back to where it’s supposed to be.

WDV: Well, we need to have tightness in the labour market, because otherwise you do not have wage increases that are fast enough, so that is going to take years. Secondly, we also need confidence of companies that they are in a position to increase their prices and to reflect the increased wages in their prices rather than taking it in their margins. Before the pandemic, what we have seen is that, yes, there was a pickup in wage growth, but there was not a translation into sales crisis and profit margins were declining, because companies did not dare to increase their prices, and that is I think the key reason why, across the globe, including in the US, inflation has been so anaemic.

MM: And we’re going to talk about the US next, William, but if we look at Europe right now, are there any fiscal policies enacted or maybe in the works that you think would help consumers to actually pay those higher prices. That’s what you need, right, you need a consumer base willing to go out and spend more for the stuff that they buy regularly or that they would normally not buy.

WDV: If we would look at the average consumer, its not so much an issue, I would say, of a lack of spending power. In various countries, in France, for instance, there are estimates that there has been €100 billion extra savings, forced savings during the lockdown and that needs to be deployed. For that to be deployed, there must be, let’s say, a confidence that we’ve seen the worst in terms of the pandemic, but also crucially important is what is the outlook for the labour market. The key indicator that I’m monitoring is what are the unemployment expectations for the next 12 months. It had risen very significantly and only recently it has eased a little bit, but remains at a high level and I think that is going to continue to act as a drag on the willingness of consumers to spend the money that they have saved.

AE: And what about the strength of the euro, because this is something when we see a strong euro that makes it more difficult for the ECB to reach its goal, doesn’t it, William. We seem to have seen some relief on that front of late, its not as strong as it was. We’ve got euro/dollar at 1.1667, but you think that the euro strengthens a little from here.

WDV: Yes, we think that the euro will strengthen. One key point is that there is now a fundamental difference in approach between the Federal Reserve and the ECB and for it to have clarity on whether the ECB, in terms of strategy, philosophy towards inflation targeting will follow in the Fed’s footsteps, it will take many, many months before they have that clarity. Also, keep in mind that the fair value of euro/dollar is probably somewhere around 1.30. I think what has been happening as of late is that we run a risk-off mode related to the US presidential election uncertainty and when its risk-off, typically the euro weakens a bit versus the dollar, so I think its just a temporary weakening.

MM: William, thanks very much. We’re going to keep you with us. As I said, we still want to talk about what’s going on the other side of the Atlantic.

AE: Let’s analyse the market risks that investors should be aware of as we head towards 3 November with our guest, William de Vijlder, Chief Economist at BNP Paribas, is still with us.

And, William, you, as many other people, make the point that it’s very difficult to call, of course, the result of the US presidential election, so what is it that you’re watching for closely? As we see the two loom into view with their messaging front and centre, as we get the first of these three debates this evening, what are you going to be watching out for? Will it be the tax policy? Will it be dealing with the virus? Will it be the climate debate? What’s going to be a focus for a chief economist at BNP Paribas?

WDV: Well, everything that you mentioned, because as an economist, we’re all interested in what the next policy of the president is going to be. The key question of course is will this play a role in how people vote, and in particular vote in the battleground votes, and that I think is where we’re running the risk that there’s just going to be a big gap between, let’s say, the analytical depth – possible analytical depth of statements that are being made in the debate and what it will do when people go out and vote.

WDV: To elaborate, of course one would hope that the US takes the corner towards a more multilateral approach, that it takes the corner towards the Paris Agreement on climate change, etc, because the world needs this, but, OK, we’ll have to see.

MM: I wonder if, as a market watcher, you think this debate… I mean, will we see increased uncertainty here after or decreased uncertainty?

WDV: Well, of course, there will be after the debate, was there any winner, any clear winner, and then what does it do in terms of the lead that Biden has in the polls, and how does it influence voting in the battleground states? I think all in all it will have a marginal impact, but uncertainty will remain very high. I think I would be monitoring, as an economist, tying in with your earlier question, in the run up to the election is whether there was any progress being made across the ranks to come to a stimulus agreement or not. I must say I’m a bit skeptical on that. Yes, there has been progress, but on the other hand, the key question is that if something would be agreed upon, who gets the credit for this? And that, in itself, may be a factor that makes reaching an agreement before the election more difficult.

AE: William, you talk in your notes ahead of our conversation about the risk of fiscal dominance that governments around the world spend so much money and the monetary authorities just have to follow, maybe stepping in and buying up some of the debt that results. Is that something you see as a global phenomenon or are we talking about particular parts of the world?

WDV: Well, we already observe it in Japan. The concern that I have is that rates on the occasion of the next recession, which hopefully will not come before five or even 10 years, with rates quite likely will still be very low, nominal interest rates, so that means that it will again be a story of using the balance sheet, quantitative easing in conjunction with social policy stimulus, and what that means is that Central Banks, I think, are kind of doomed to accept that on the occasion of every recession, their balance sheet goes up eventually. Then there is the question of whether that will bring us in kind of a fiscal dominance [story]. I think you can have different types of fiscal dominance, but the fact that you always have to use your balance sheets is something that is becoming problematic eventually.

AE: William, thanks very much for your time today.

William de Vijlder, Chief Economist at BNP Paribas.




Tuesday 29 September 2020 07.14

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