William De Vijlder

Group Chief Economist BNP Paribas

The (un)surprising weakening of the dollar and what could change it

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Bloomberg Interview 20200929

William De Vijlder’s interview on Bloomberg TV – September 29, 2020

In his interview on “Bloomberg Markets: European Open”, William De Vijlder, Chief Economist at BNP Paribas, gives his view on ECB’s leeway on growth and inflation against the background of the pandemic-induced recession. The strenghtening of euro, fiscal dominance as well as uncertainty (surrounding notably the next American election) will also be discussed.

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Monetary policy

QE forever: on the slippery slope towards fiscal dominance?

Declining effectiveness of monetary policy and increased fiscal policy space make the case for increased public debt issuance in combination with quantitative easing to boost growth. There is concern that such policy coordination would lead to fiscal dominance whereby monetary policy is dictated by considerations in terms of public finances to maintain public debt sustainability. Once the pandemic will be behind us, governments will have the responsibility to improve their public finances. Inaction in this respect would put the burden on the ECB when fighting future downturns. It would be a different type of fiscal dominance.

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FED

US monetary policy goes inclusive

Over the past 10 years, fostering inclusive growth has moved higher up the agenda of governments, international institutions and, increasingly, companies. Under Chairman Powell, it has become a key topic for the Federal Reserve through the focus on the heterogeneity of the labour market situation of different socio-economic groups. It has led to the view that pre-emptive tightening based on a declining unemployment rate is unwarranted. On the contrary, it may very well stop people from finding a job.  It will be interesting to see whether other central banks and in particular the ECB in the context of its strategy review, will follow in the Fed’s footsteps.

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ECB: patience required

The outcome of the ECB meeting was eagerly awaited considering the latest inflation data, the strengthening of the euro and the Federal Reserve’s new strategy of targeting average inflation. The implicit message from the ECB President’s press conference was “be patient” on the three areas of concern. Inflation is projected to pick up whilst staying well below the target, the euro exchange rate is being closely monitored and the sheer number of strategy review workstreams implies it will take quite some time before we learn about the outcome in terms of the inflation objective.

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Illustration EcoTVW du 4/09

The headaches of the ECB

The Covid-19 represents a massive disinflationary shock because of the demand shortfall it creates. This has triggered a very strong reaction of central banks across the globe, including the ECB. The ECB’s action –in particular the PEPP- has been successful in maintaining fluid financing, both bank-based and capital-market based. Nevertheless, the ECB has a headache, three actually. Inflation is too low and declining, the strong euro reinforces this development and there is concern that the change in the longer-term goal of the Fed, which will now target inflation averaging 2 percent over time, will complicate matters.

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La Fed

The global repercussions of the Federal Reserve’s inflation averaging strategy

The Fed’s new inflation averaging strategy should have global real and financial spillover effects. The former refer to international trade whereby a more sustained expansion of US GDP should pull along the economies of its trading partners via increased US imports. The financial spillovers are driven by capital flows, monetary policy and risk appetite. These factors are highly intertwined. The new Fed strategy will also force other central banks to revisit their own strategy. This creates an issue for the ECB.

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FED

The Federal Reserve enters a new era of inflation targeting

The Federal Reserve has changed its longer-run goals. Going forward, monetary policy will focus on the shortfall of employment from its maximum level, rather than on the deviations from this level. More importantly, the central bank will now seek to achieve inflation that averages 2 percent over time. The announcement implies a more accommodative stance because the timing of the first rate hike is now pushed further into the future. It also means that, eventually, the Fed’s reaction function will become more difficult to read: when will average inflation –a concept that remains to be defined- warrant a policy tightening? Such ambiguity would then lead to increased volatility, unless guidance takes an even bigger role.

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Incertitude

Looking beyond the second quarter GDP numbers

Unsurprisingly, this week’s GDP numbers for the second quarter were exceptionally bad. The third quarter should see strong quarterly growth, if only because of a powerful base effect. It also leaves room for disappointment however, should the growth momentum start to slip over the summer. In the US, this already seems to be the case. In the euro area, business surveys continue to improve and the employment expectations indicator sees a marked increase. Households are not convinced however and their unemployment expectations have remained broadly stable.

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Illustration EcoTV Week du 31/07

The euro area economy: doing better

Survey data for the euro area continue to improve. The flash purchasing managers’ indices for July have passed the 50 hurdle in manufacturing and services as well as for the composite index, implying activity is expanding again. In addition, export orders are improving. Although companies feel more confident than the month before, the level of confidence is still rather low compared to historical averages. This is illustrated in the latest data for German and French business sentiment: better but starting from a low level. Caution continues to prevail, which shows up very clearly in the employment component of the business surveys. A lot has to do with the concern about how the pandemic will evolve. Against this background, the fiscal stimulus at the national and EU level will be more than welcome.

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Commission européenne

The European Council agreement: not perfect, but truly historical

The European Council agreement this week on a recovery effort is, inevitably, a compromise but it is nevertheless historical It consists of a combination of grants and loans to member states and is funded by debt issued at the EU-level It sets a precedent for the management of future crisis situations with a better balance between monetary and fiscal policy. The possibility of such a two-pronged approach, reduces economic tail risk, which should structurally support confidence of households, companies and investors. The targeted allocation of the grants to countries which are in greater need, is another historical achievement and should generate a larger multiplier effect.

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EcoTVWeek 24072020

The European Council agreement: truly historical

The EU members have settled an agreement on the recovery fund of historic importance. Although the amount of subsidies has been scaled back from the initial proposal, the EUR 750 bn package still accounts for more than 5 % of EU 2019 GDP. The agreement also sets a precedent that could guide policy in case of future major economic recessions. In addition, the milestones members need to abide by should foster the growth potential and help the green and digital transition.

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Cogs economic recovery

What comes after the mechanical rebound?

The easing of lockdown measures has caused a significant improvement in business sentiment and a mechanical rebound in activity and demand. In the near term, the narrowing of the gap between observed and normal activity levels should gradually lead to less spectacular growth numbers. These are underpinned by pent-up demand, monetary and fiscal policy support and the possibility for households to use the extra-savings accumulated during the lockdown. A lot will depend however on how uncertainty evolves. The health situation is not under control in certain countries and there are concerns about the risk of a flare-up. Households face income uncertainty due to bleak labour market prospects. Against this background, companies may tune down their investment plans.

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Interview CNBC 2020 07 16

CNBC UK Worldwide Exchange Interview – July 16, 2020

William De Vijlder, Chief Group economist at BNP Paribas gives us a picture of the global economy against the background of the Covid-19 pandemic. China recovery, US equity markets will be discussed. We will see how the labour market and consumer spending are keys to the economic recovery.

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Change

COVID-19 AND THE ENVIRONMENT

Due to the externalities of economic activity, the lockdown has had a considerable impact, not only on the economy but also on the environment. In a post-lockdown world, the question is how and to what extent the experience of the pandemic will influence the environment in the years to come. Covid-19 may make people more health-focused, including how the environment influences one’s health. This may change behaviour in terms of mobility and spending. It may also cause an increase in the allocation to sustainable investments, which in turn could influence corporate strategies. Changes in
global value chains can also have an environmental impact. For fiscal policy, there is an opportunity of meeting the short-term goal of boosting the post-pandemic recovery by making investments that contribute to reaching the goals related to climate change and the environment.

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Illustration Edito 20.27

EUROZONE: A GROWTH SPURT OR MARATHON?

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.

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Webcast 3 July 2020

How to prepare for the second half of 2020 and beyond

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.

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Household consumption

How to spend it? Vouchers versus VAT cuts

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.

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Longue vue

Boomerang economics

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.

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Stormy sky

The long shadow of unemployment

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.

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William De Vijlder

About William De Vijlder

Group Chief
Economist
BNP Paribas
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