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Clemente De Lucia, Senior Economist at BNP Paribas - How should the ECB act to counter deflationary risks: Implications for CFOs

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Clemente De Lucia, Senior Economist at BNP Paribas spoke at the CFO Event May 2014

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Clemente De Lucia, Senior Economist at BNP Paribas - How should the ECB act to counter deflationary risks: Implications for CFOs

  1. 1. Economic Research Department Clemente DE LUCIA clemente.delucia@bnpparibas.com Eurozone: Navigating in a low inflation environment CFO Event, May 2014
  2. 2. 2 Cont ent s 1. Wher e we ar e… 2. Why i nf l at i on i s so l ow… 3. Ri sks of l ow i nf l at i on l evel s 4. Def l at i on? 5. Shoul d t he ECB act ? Wi l l i t act ? And how? Eurozone: Navigating in a low inflation environment
  3. 3. 3 Inflation trending downwards (y/y %) Source: BNP Paribas, Eurostat, Markit Fact or s behi nd t he i nf l at i on decl i ne ( 1)  I nf l at i on at cycl i cal l ow….  Eas t er di s t or t i ons ?  Commodi t i es ?  Exchange r at e t oo hi gh?  Thos e ar e pl aus i bl e expl i cat i ons  I s t her e s omet hi ng mor e? Eurozone: Navigating in a low inflation environment Headline Core Lower commodity prices? (12 month differences) -25 -20 -15 -10 -5 0 5 10 15 20 25 -50 -40 -30 -20 -10 0 10 20 30 40 1997 1999 2001 2003 2005 2007 2009 2011 2013 Energy Oil in euro Contribution to inflation (y/y % and pp points) -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 1998 2000 2002 2004 2006 2008 2010 2012 2014 Energy Food Core Head
  4. 4. 4 Contribution to core inflation(y/y % and PP) Import prices: Trending downwards Source: BNP Paribas, Eurostat, Markit Fact or s behi nd t he i nf l at i on decl i ne ( 2)  I nf l at i on at cycl i cal l ow….  Eas t er di s t or t i ons ?  Commodi t i es ?  Exchange r at e t oo hi gh?  Thos e ar e pl aus i bl e expl i cat i ons  I s t her e s omet hi ng mor e? Eurozone: Navigating in a low inflation environment Core decomposition (y/y %) 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 -0.5 0.0 0.5 1.0 1.5 2.0 1998 2002 2006 2010 2014 40 60 -8 -6 -4 -2 0 2 4 6 8 1999 2001 2003 2005 2007 2009 2011 2013 Non Energy industrial goods Services Import pricesNon-domestic producer prices Input prices (Composite PMI –rhs-) y/y % Balance of opinion -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 1998 2002 2006 2010 2014 Services NEIG core
  5. 5. 5 Core inflation: country breakdown (y/y %) Source: BNP Paribas, Eurostat Wher e we ar e  I nf l at i on l ow  I nt er nal deval uat i on?  I s t her e, however, a pr obl em of s l uggi s h demand?  Cr i s i s and l ar ge out put gap… Eurozone: Navigating in a low inflation environment Jan-14 Feb-14 Adjustment in Peripheral countries (Unit Labour Costs, 2008 Q1= 100) Peripheral Core Core inflation decomposition: Peripheral versus Core countries (y/y %) Peripheral Core -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 GR PT ES IE IT EZ NL FR BE DE LU FI AT Peripheral Core EZ average March-14 0.5 1.0 1.5 2.0 0.0 0.5 1.0 1.5 2.0 2.5 2005 2007 2009 2011 2013 5.5 6.5 7.5 8.5 9.5 10.5 11.5 12.50.6 1.2 1.8 2.4 3.0 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Spare capacity will weigh on inflation Core inflation Unemployment rate - Inverted scale, right- 100 102 104 106 108 110 112 114 2008 2009 2010 2011 2012 2013 y/y % %
  6. 6. 6 Inflation expectations from Survey of Professional Forecasters (y/y %) Source: BNP Paribas, CF, Bloomberg, ECB I nf l at i on expect at i ons …t r endi ng downwar ds  I nf l at i on and i nf l at i on expect at i ons …l i nked i n a sel f - f ul f i l l i ng mechani s m Eurozone: Navigating in a low inflation environment 5 –Year Ahead 2-year Ahead …from Consensus Forecasts (y/y %) Refi rate 1-year Ahead …and from financial markets (y/y %) Five years 5year-ahead Tow years 2-year ahead ( ) ( )1 ; ; ; ; e t t t j e e t t t j f f π π π χ π π π χ − − −  =  = 1 1.2 1.4 1.6 1.8 2 2.2 2.4 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 2003 2005 2007 2009 2011 2013 1.0 1.5 2.0 2.5 2000 2002 2004 2006 2008 2010 2012 2014 1.0 1.4 1.8 2.2 2.6 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1-year Ahead  Medi um- t o- l ong t er m i nf l at i on expect at i ons : pr obl ems of ci r cul ar i t y and r i s k pr i ma  Bet t er meas ur es at an hor i zon bet ween 1 and 2 year s ahead
  7. 7. 7 Source: BNP Paribas, Eurostat Ri s ks of l ow i nf l at i on  Eur ozone par t i cul ar l y sensi t i ve t o l ow i nf l at i on l evel gi ven t he hi gh l evel of debt r at i o i n sever al count r i es: l ook at t he f l ow- st ock r el at i onshi p  Lower bound f or nomi nal r at es. . What about r eal i nt er est r at es?  Adj ust ment t hr oughout an i nt er nal deval uat i on much mor e compl i cat ed i f i nf l at i on i n cor e count r i es i s l ow  Buf f er agai nst negat i ve shocks?  Ent er i ng i n def l at i on? …Def i ni t i on: gener al i zed f al l of pr i ce component s among sect or s and count r i es Eurozone: Navigating in a low inflation environment Below 1% Debt dynamics; the case of Italy. What should happen with low or even falling inflation rates? Debt ratio Non Energy Industrial goods… Below 2% Below 2% Below 0% Below 0% 115 120 125 130 135 140 2009 2012 2015 2018 115 120 125 130 135 140 2009 2012 2015 2018 Services breakdown by components…the weakness is spreading? 0 10 20 30 40 50 60 70 80 1997 2001 2005 2009 2013 Below 1% 0 20 40 60 80 100 1997 2001 2005 2009 2013 1 1 1 t t i d d pb γ π −  + = − ÷ + + 
  8. 8. 8 Act i ons f r om t he pol i cy maker 1. Shoul d t he ECB act ?  Yes  Spar e capaci t y, weak r ecover y,  ECB f ar f r om t ar get , ECB mandat e,  Asymmet r i c r eact i on? 1. Wi l l i t act ?  Pr obabi l i t y i s i ncr eas i ng…  Apr i l ECB meet i ng mor e dovi s h. The Bank mi ght act not onl y t o count er def l at i onar y r i s ks, but al so t o count er t he ef f ect s of a t oo l ow l evel of i nf l at i on 1. Whi ch act i ons?  Convent i onal and/ or non convent i onal meas ur es  Di f f er ent i ns t r ument s t o addr ess di f f er ent pr obl ems  Negat i ve depos i t r at es ? Anot her speci al LTROs ?  Quant i t at i ve eas i ng? 1. When?  Dat a dependent Eurozone: Navigating in a low inflation environment
  9. 9. Economic Research Department │ 12/05/14│ 9 Economi c Res ear ch Depar t ment • Jean- Phi l i ppe COTI S Chi ef Economi st +33. ( 0) 1. 55. 77. 47. 31 j ean- phi l i ppe. cot i s@bnppar i bas. com • Jean- Luc PROUTAT Head +33. ( 0) 1. 58. 16. 73. 3 j ean- l uc. pr out at @bnppar i bas. com • Al exandr a ESTI OT Deput y Head – Gl obal i sat i on, Uni t ed St at es, Canada +33. ( 0) 1. 58. 16. 81. 69 al exandr a. est i ot @bnppar i bas. com • Hél ène BAUDCHON Fr ance, Bel gi um, Luxembour g +33. ( 0) 1. 58. 16. 03. 63 hel ene. baudchon@bnppar i bas. com • Fr édér i que CERI SI ER Publ i c f i nance – Eur opean i nst i t ut i ons +33. ( 0) 1. 43. 16. 95. 52 f r eder i que. cer i si er @bnppar i bas. com • Cl ement e De LUCI A Eur o zone, I t al y - Monet ar y i ssues - Economi c model l i ng +33. ( 0) 1. 42. 98. 27. 62 cl ement e. del uci a@bnppar i bas. com • Thi baul t MERCI ER Spai n, Por t ugal , Gr eece, I r el and +33. ( 0) 1. 57. 43. 02. 91 t hi baul t . mer ci er @bnppar i bas. com • Car ol i ne NEWHOUSE Ger many, Aust r i a - Super vi si on of publ i cat i ons +33. ( 0) 1. 43. 16. 95. 50 car ol i ne. newhouse@bnppar i bas. com • Cat her i ne STEPHAN Uni t ed Ki ngdom, Swi t zer l and, Nor di c Count r i es – Labour mar ket +33. ( 0) 1. 55. 77. 71. 89 cat her i ne. st ephan@bnppar i bas. com • Raymond VAN DER PUTTEN Japan, Aust r al i a, Net her l ands - Envi r onment - Pensi ons +33. ( 0) 1. 42. 98. 53. 99 r aymond. vander put t en@bnppar i bas. com • Laur ent QUI GNON Head +33. ( 0) 1. 42. 98. 56. 54 l aur ent . qui gnon@bnppar i bas. com • Del phi ne CAVALI ER +33. ( 0) 1. 43. 16. 95. 41 del phi ne. caval i er @bnppar i bas. com • Cél i ne CHOULET +33. ( 0) 1. 43. 16. 95. 54 cel i ne. choul et @bnppar i bas. com • Laur ent NAHMI AS +33. ( 0) 1. 42. 98. 44. 24 l aur ent . nahmi as@bnppar i bas. com • Fr ançoi s FAURE Head +33. ( 0) 1 42 98 79 82 f r ancoi s. f aur e@bnppar i bas. com • Chr i st i ne PELTI ER Deput y Head - Met hodol ogy, Chi na, Vi et nam +33. ( 0) 1. 42. 98. 56. 27 chr i st i ne. pel t i er @bnppar i bas. com • St éphane ALBY Af r i ca, Fr ench- speaki ng count r i es +33. ( 0) 1. 42. 98. 02. 04 st ephane. al by@bnppar i bas. com • Syl vai n BELLEFONTAI NE Lat i n Amer i ca - Met hodol ogy, Tur key +33. ( 0) 1. 42. 98. 26. 77 syl vai n. bel l ef ont ai ne@bnppar i bas. com • Pascal DEVAUX Mi ddl e East – Scor i ng +33. ( 0) 1. . 43. 16. 95. 51 pascal . devaux@bnppar i bas. com • Hél ène DROUOT Asi a +33. ( 0) 1. 42. 98. 33. 00 hel ene. dr ouot @bnppar i bas. com • Jean- Loï c GUI EZE Af r i ca, Engl i sh and Por t uguese speaki ng count r i es +33. ( 0) 1. 42. 98. 43. 86 j eanl oi c. gui eze@bnppar i bas. com • Val ent i n LETHI ELLEUX l at i n Amer i ca +33. ( 0) 1. 42. 98. 48. 45 val ent i n. l et hi el l eux@bnppar i bas. com • Johanna MELKA Asi a – Capi t al Fl ows +33. ( 0) 1. 58. 16. 05. 84 j ohanna. mel ka@bnppar i bas. com • Al exandr e VI NCENT Cent r al and East er n Eur ope +33. ( 0) 1. 43. 16. 95. 44 al exandr e. vi ncent @bnppar i bas. com • Al exandr a WENTZI NGER Af r i ca, Br azi l +33. ( 0) 1. 55. 77. 80. 60 al exandr a. went zi nger @bnppar i abs. com •Mi chel BERNARDI NI Publ i c Rel at i ons Of f i cer +33. ( 0) 1. 42. 98. 05. 71 mi chel . ber nar di ni @bnppar i bas. com OECD ECONOMI ES BANKI NG ECONOMI CS EMERGI NG ECONOMI ES AND COUNTRY RI SK
  10. 10. Economic Research Department │ 12/05/14│ 10 Our publ i cat i ons The i nf or mat i on and opi ni ons cont ai ned i n t hi s r epor t have been obt ai ned f r om, or ar e bas ed on, publ i c s our ces bel i eved t o be r el i abl e, but no r epr es ent at i on or war r ant y, expr es s or implied, i s made t hat s uch i nf or mat i on i s accur at e, compl et e or up t o dat e and i t s houl d not be r el i ed upon as s uch. Thi s r epor t does not cons t i t ut e an of f er or s ol i ci t at i on t o buy or s el l any s ecur i t i es or ot her i nves t ment . I nf or mat i on and opi ni ons cont ai ned i n t he r epor t ar e publ i s hed f or t he as s i s t ance of r eci pi ent s , but ar e not t o be r el i ed upon as aut hor i t at i ve or t aken i n s ubs t i t ut i on f or t he exer ci s e of j udgement by any r eci pi ent , ar e s ubj ect t o change wi t hout not i ce and not i nt ended t o pr ovi de t he s ol e bas i s of any eval uat i on of t he i ns t r ument s di s cus s ed her ei n. Any r ef er ence t o pas t per f or mance s houl d not be t aken as an i ndi cat i on of f ut ur e per f or mance. To t he f ul l es t ext ent per mi t t ed by l aw, no BNP Par i bas gr oup company accept s any l i abi l i t y what s oever ( i ncl udi ng i n negl i gence) f or any di r ect or cons equent i al l os s ar i s i ng f r om any us e of or r el i ance on mat er i al cont ai ned i n t hi s r epor t . Al l es t i mat es and opi ni ons i ncl uded i n t hi s r epor t ar e made as of t he dat e of t hi s r epor t . Unl es s ot her wi s e i ndi cat ed i n t hi s r epor t t her e i s no i nt ent i on t o updat e t hi s r epor t . BNP Par i bas SA and i t s af f i l i at es ( col l ect i vel y “ BNP Par i bas ” ) may make a mar ket i n, or may, as pr i nci pal or agent , buy or s el l s ecur i t i es of any i s s uer or per s on ment i oned i n t hi s r epor t or der i vat i ves t her eon. BNP Par i bas may have a f i nanci al i nt er es t i n any i s s uer or per s on ment i oned i n t hi s r epor t , i ncl udi ng a l ong or s hor t pos i t i on i n t hei r s ecur i t i es and/ or opt i ons , f ut ur es or ot her der i vat i vei ns t r ument s bas ed t her eon. Pr i ces , yi el ds and ot her s i mi l ar i nf or mat i on i ncl uded i n t hi s r epor t ar e i ncl uded f or i nf or mat i on pur pos es . Numer ous f act or s wi l l af f ect mar ket pr i ci ng and t her e i s no cer t ai nt y t hat t r ans act i ons coul d be execut ed at t hes e pr i ces . BNP Par i bas , i ncl udi ng i t s of f i cer s and empl oyees may s er ve or have s er ved as an of f i cer , di r ect or or i n an advi s or y capaci t y f or any per s on ment i oned i n t hi s r epor t . BNP Par i bas may, f r om t i me t o t i me, s ol i ci t , per f or m or have per f or med i nves t ment banki ng, under wr i t i ng or ot her s er vi ces ( i ncl udi ng act i ng as advi s er , manager , under wr i t er or l ender ) wi t hi n t he l as t 12 mont hs f or any per s on r ef er r ed t o i n t hi s r epor t . BNP Par i bas may be a par t y t o an agr eement wi t h any per s on r el at i ng t o t he pr oduct i on of t hi s r epor t . BNP Par i bas , may t o t he ext ent per mi t t ed by l aw, have act ed upon or us ed t he i nf or mat i on cont ai ned her ei n, or t he r es ear ch or anal ys i s on whi ch i t was bas ed, bef or e i t s publ i cat i on. BNP Par i bas may r ecei ve or i nt end t o s eek compens at i on f or i nves t ment banki ng s er vi ces i n t he next t hr ee mont hs f r om or i n r el at i on t o any per s on ment i oned i n t hi s r epor t . Any per s on ment i oned i n t hi s r epor t may have been pr ovi ded wi t h s ect i ons of t hi s r epor t pr i or t o i t s publ i cat i on i n or der t o ver i f y i t s f act ual accur acy. BNP Par i bas i s i ncor por at ed i n Fr ance wi t h l i mi t ed l i abi l i t y. Regi s t er ed Of f i ce 16 Boul evar d des I t al i ens , 75009 Par i s . Thi s r epor t was pr oduced by a BNP Par i bas gr oup company. Thi s r epor t i s f or t he us e of i nt ended r eci pi ent s and may not be r epr oduced ( i n whol e or i n par t ) or del i ver ed or t r ans mi t t ed t o any ot her per s on wi t hout t he pr i or wr i t t en cons ent of BNP Par i bas . By accept i ng t hi s document you agr ee t o be bound by t he f or egoi ng l i mi t at i ons . Cer t ai n count r i es wi t hi n t he Eur opean Economi c Ar ea: Thi s r epor t i s s ol el y pr epar ed f or pr of es s i onal cl i ent s . I t i s not i nt ended f or r et ai l cl i ent s and s houl d not be pas s ed on t o any s uch per s ons . Thi s r epor t has been appr oved f or publ i cat i on i n t he Uni t ed Ki ngdom by BNP Par i bas London Br anch. BNP Par i bas London Br anch i s aut hor i s ed and s uper vi s ed by t he Aut or i t é de Cont r ôl e Pr udent i el and aut hor i s ed and s ubj ect t o l i mi t ed r egul at i on by t he Fi nanci al Ser vi ces Aut hor i t y. Det ai l s of t he ext ent of our aut hor i s at i on and r egul at i on by t he Fi nanci al Ser vi ces Aut hor i t y ar e avai l abl e f r om us on r eques t . Thi s r epor t has been appr oved f or publ i cat i on i n Fr ance by BNP Par i bas SA, i ncor por at ed i n Fr ance wi t h Li mi t ed Li abi l i t y and i s aut hor i s ed by t he Aut or i t é de Cont r ôl e Pr udent i el ( ACP) and r egul at ed by t he Aut or i t é des Mar chés Fi nanci er s ( AMF) whos e head of f i ce i s 16, Boul evar d des I t al i ens 75009 Par i s , Fr ance. Thi s r epor t i s bei ng di s t r i but ed i n Ger many ei t her by BNP Par i bas London Br anch or by BNP Par i bas Ni eder l as s ung Fr ankf ur t am Mai n , a br anch of BNP Par i bas S. A. whos e head of f i ce i s i n Par i s , Fr ance. BNP Par i bas S. A. – Ni eder l as s ung Fr ankf ur t am Mai n, Eur opa Al l ee 12, 60327 Fr ankf ur t i s aut hor i s ed and s uper vi s ed by t he Aut or i t é de Cont r ôl e Pr udent i el and i t i s aut hor i s ed and s ubj ect t o l i mi t ed r egul at i on by t he Bundes ans t al t f ür Fi nanzdi ens t l ei s t ungs auf s i cht ( BaFi n) . Uni t ed St at es : Thi s r epor t i s bei ng di s t r i but ed t o US per s ons by BNP Par i bas Secur i t i es Cor p. , or by a s ubs i di ar y or af f i l i at e of BNP Par i bas t hat i s not r egi s t er ed as a US br oker - deal er t o US maj or i ns t i t ut i onal i nves t or s onl y. BNP Par i bas Secur i t i es Cor p. , a s ubs i di ar y of BNP Par i bas , i s a br oker - deal er r egi s t er ed wi t h t he U. S. Secur i t i es and Exchange Commi s s i on and a member of t he Fi nanci al I ndus t r y Regul at or y Aut hor i t y and ot her pr i nci pal exchanges . BNP Par i bas Secur i t i es Cor p. accept s r es pons i bi l i t y f or t he cont ent of a r epor t pr epar ed by anot her non- U. S. af f i l i at e onl y when di s t r i but ed t o U. S. per s ons by BNP Par i bas Secur i t i es Cor p. J apan: Thi s r epor t i s bei ng di s t r i but ed t o J apanes e bas ed f i r ms by BNP Par i bas Secur i t i es ( J apan) Li mi t ed or by a s ubs i di ar y or af f i l i at e of BNP Par i bas not r egi s t er ed as a f i nanci al i ns t r ument s f i r m i n J apan, t o cer t ai n f i nanci al i ns t i t ut i ons def i ned by ar t i cl e 17- 3, i t em 1 of t he Fi nanci al I ns t r ument s and Exchange Law Enf or cement Or der . BNP Par i bas Secur i t i es ( J apan) Li mi t ed i s a f i nanci al i ns t r ument s f i r m r egi s t er ed accor di ng t o t he Fi nanci al I ns t r ument s and Exchange Law of J apan and a member of t he J apan Secur i t i es Deal er s As s oci at i on and t he Fi nanci al Fut ur es As s oci at i on of J apan. BNP Par i bas Secur i t i es ( J apan) Li mi t ed accept s r es pons i bi l i t y f or t he cont ent of a r epor t pr epar ed by anot her non- J apan af f i l i at e onl y when di s t r i but ed t o J apanes e bas ed f i r ms by BNP Par i bas Secur i t i es ( J apan) Li mi t ed. Some of t he f or ei gn s ecur i t i es s t at ed on t hi s r epor t ar e not di s cl os ed accor di ng t o t he Fi nanci al I ns t r ument s and Exchange Law of J apan. Hong Kong: Thi s r epor t i s bei ng di s t r i but ed i n Hong Kong by BNP Par i bas Hong Kong Br anch, a br anch of BNP Par i bas whos e head of f i ce i s i n Par i s , Fr ance. BNP Par i bas Hong Kong Br anch i s r egi s t er ed as a Li cens ed Bank under t he Banki ng Or di nance and r egul at ed by t he Hong Kong Monet ar y Aut hor i t y. BNP Par i bas Hong Kong Br anch i s al s o a Regi s t er ed I ns t i t ut i on r egul at ed by t he Secur i t i es and Fut ur es Commi s s i on f or t he conduct of Regul at ed Act i vi t y Types 1, 4 and 6 under t he Secur i t i es and Fut ur es Or di nance. Some or al l t he i nf or mat i on r epor t ed i n t hi s document may al r eady have been publ i s hed on ht t ps : / / gl obal mar ket s . bnppar i bas . com © BNP Par i bas ( 2012) . Al l r i ght s r es er ved. ht t p: / / economi c- r esear ch. bnppar i bas. com To r ecei ve our publ i cat i ons, pl ease subscr i be on our websi t e. 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