The rebalancing of risks – BNP Paribas

According to William De Vijlder, the Group Chief Economist at BNP Paribas, risk has been considered by the IMF, the European Commission and others as being skewed to the downside. An important implication of this is that the confidence about the baseline forecast will be lower, which in turn may influence consumer spending and, particularly, business investment.

Key Quotes:

“In recent weeks, somewhat of a rebalancing of risks has occurred. There is hope of a so-called ‘phase 1’ trade deal between the US and China. It’s called phase 1 because of the rather limited scope. In addition, a disorderly Brexit now looks less likely. Finally, recent business survey indicators have stabilised in the US and the eurozone.”
 
“Since more than a year, uncertainty and slowing growth have been the equivalent of hitting the brakes, whereas the recent additional monetary easing in the US and the eurozone correspond to pushing the throttle. Should these developments be confirmed, there is even a chance, for the first time since a long time, of an upside surprise in 2020.”
 
“After having desperately waited for some good news, there is a genuine risk that a positive development triggers an overenthusiastic reaction.”
 
“Looking at the risk of the European Commission, several risk factors remain problematic: geopolitics, Chinese slowdown, climate change, financial market adjustments. On the spillovers from manufacturing to services, the recent stabilisation of survey data provide some hope. On trade tensions, a very limited deal between the US and China could raise concerns about the phase 2 negotiations. In addition, the discussions between the US and the EU may become the next source of worry. Finally, an orderly Brexit will cause uncertainty to vanish because the future relationship still needs to be negotiated.”
 
“All in all, risks have rebalanced somewhat and there is potential for an upside surprise, but they are still skewed to the downside.”