William De Vijlder

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.

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.

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.

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.

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.

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.

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.