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Global concern: politics. Indian concern: credit

BNP Paribas Economic Research

15th September 2016

In a nutshell

In this edition of BNP Paribas' economic research coverage, William De Vijlder takes us through what he sees as key concerns to watch out for globally - its not economic growth, but its politics and its impact on economies and markets. There's US, there is the Brexit fallout, there's Spain and Italy and then in 2017, there's Germany and France - in terms of what to look out for in political developments.

Turning to India, Johanna Melka is positive on progress in GST, but worries that deceleration in credit growth and weak financial positions of large corporations can come in the way of near term as well as medium term growth.


Verbatim transcript of video

Decision time: politics and central banks to take centre stage

FRANCOIS DOUX: Hello and welcome to this summer edition of Eco TV, your magazine tailored by BNP Paribas' economists. On the menu of this September edition: What's next until the end of the year? Chief Economist William de Vijlder will give us his global outlook. Next, for 'The Chart of the month', we will talk about India. Johanna Melka will tell us why she remains quite cautious despite more than 7% of growth in India.

What to expect till the end of the year in terms of macroeconomics? We are joined by Chief Economist William de Vijlder. Over the summer, markets have been quite well-oriented. Is this the sign that the economy is improving?

WILLIAM DE VIJLDER: Experience shows that we shouldn't look too much at markets for economic forecasts. The dominating thematic over the summer has been that central bank action or its prospect, hence liquidity, has been the main driver still. The other important point is that markets have ignored key sources of uncertainty. Brexit and its consequences have been ignored. To some degree because the early evidence in the data was actually quite comforting. The bank stress tests have been ignored. So all in all, liquidity has been driving markets.

FRANCOIS DOUX: But still the quantitative easing is now much more common among central banks.

WILLIAM DE VIJLDER: That is why the thematic of global spillovers is dominating. It is very important to see US yields going down whereas the outlook for the data of the second half of the year is getting better. You may wonder why. When the Bank of England is joining the ECB and the Bank of Japan to inject liquidity, it ends up influencing the US yield environment as well.

FRANCOIS DOUX: What about the economic data?

WILLIAM DE VIJLDER: On the data front, it very much depends on the country you look at. In the United States, for instance, real time estimates are showing that third quarter should see a pretty good growth performance. In the Eurozone, on the other hand, the first half has been strong and now growth is moderating. This is at least the impression you get looking at sentiment and confidence data. China is the disappointing factor in the sense that there has been a big stimulus effort predominantly on the fiscal side. The budget deficit is on the rise but the economy continues to slow. This is a big point to follow going forward.

FRANCOIS DOUX: What about emerging markets? We will talk with Johanna Melka about India, with 7% growth still. What's your view globally speaking?

WILLIAM DE VIJLDER: Some countries continue to do very well if you look at the absolute growth rate. You mentioned India quite rightly. Even China in the absolute is great. Of course what we're interested in is the delta of the growth rate. In that respect, what is interesting to emphasize is that in Brazil for instance, there is now clear evidence of some improvement in a couple of months to come. Even in Russia, the outlook is getting a bit better. So here and there, you do see that it is getting a bit better in emerging markets. If you look in the aggregate, at the PMI data for emerging markets, it shows a recovery and this has not gone unnoticed in markets because emerging markets have benefited from substantial inflows.

FRANCOIS DOUX: Which key elements will you follow till the end of the year to get a good view on the economic side?

WILLIAM DE VIJLDER: The data remain important as ever; however nowadays central banks are more important because the ECB and the Bank of Japan have clearly indicated in the past that they still have the possibility, the leeway to do more. So now markets will tell us: "Okay, what are you going to do?" That's the first important point. And the other important point is that it seems very clear now looking at the data, but also looking at the statements of Fed officials, that the Fed will hike before year end. Key question is how that will be digested by the market. My view is that actually the market will look at it as a kind of non-event.

FRANCOIS DOUX: We will have lots of events on the political side. Elections, referendums and so on all around the world.

WILLIAM DE VIJLDER: The second very important point to follow is on the political side. The US elections obviously. Depending on the outcome, markets will react quite differently. We will have the opportunity to come back on that later in Eco TV shows. The other point which is important is in Europe. We want to see clarity now. How the Brits will handle their Brexit? It has been very quiet. The other point which is important is the Italian constitutional reform referendum. It is a test for the Prime Minister. And Spain is still struggling to have a new government. There again, there will be elections. And gradually, the eyes will focus on 2017 with the elections in France and in Germany. Very much to happen on the political side.

FRANCOIS DOUX: A lot of things to follow together. Thank you very much for coming.

FRANCOIS DOUX: For 'The Chart of the Month', we will talk about India. Johanna Melka (Economist Asia and Russia), hello. 7.1%, this is the GDP growth in India for the current fiscal year, the first quarter April to June. Is it a good trend?

JOHANNA MELKA: Indian economic growth decelerated slightly in the first quarter. But it's a good performance, especially compared with other emerging countries in India.

FRANCOIS DOUX: What are the drivers of this Indian economy?

JOHANNA MELKA: The main driver of India's economic growth is the private consumption. It was fairly robust in this first quarter and should remain very robust, especially thanks to the sharp rise in public wages. The main source of concern is investments. Indeed, investments contracted by more than 3% in this quarter.

FRANCOIS DOUX: How do you explain this deceleration of investments in India?

JOHANNA MELKA: Investments contracted due to the deterioration in financial situation of corporations and public banks. Indeed, after the financial crisis in 2009, the debt of corporations increased sharply. Since 2014, corporations were constrained to reduce their debt and to improve their balance sheets. So they reduced their investments. On the overall, we observe that since the end of 2015, there is an improvement in their financial situation. But if you study the details, the problem is that the situation of corporations in industry remains very weak, especially in infrastructures, metals, etc. And in these sectors of activity, public banks are highly exposed to credit risks.

FRANCOIS DOUX: What is the situation of the balance sheets of the banks?

JOHANNA MELKA: The financial health of banks has deteriorated. The problem is that last March non-performing loans in public banks reached around 15% of total loans. Consequently, banks have to improve their balance sheet in order to reduce risk and to respect Basel III ratio. In this context, they decreased credit growth. We can observe in this chart that credit growth, especially in infrastructure, has decelerated significantly.

FRANCOIS DOUX: In the end of the day, you remain cautious about India?

JOHANNA MELKA: We remain cautious because this deceleration of credit and the weak financial position of corporations weigh on short term growth but also on medium term growth. But the good new is that last July, the GST law passed in the upper house of Parliament. This law should increase significantly the fiscal leeway of the government.

FRANCOIS DOUX: That's good news. Thank you very much.

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