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The world economy is weathering the geopolitical uncertainty. The macroeconomic data published during the summer have confirmed that the world economy is still on its predicted course with growth gradually getting stronger in spite of flare-ups in armed conflicts in the Ukraine, Iraq and the Middle East, leading to some episodes of volatility in financial markets. Nonetheless, contrasting situations can be seen within this overall trend of activity gaining traction. While the US is speeding up, Japan is slowing down more than expected, hindered by its VAT hike in spring. Among the emerging economies, China is holding firm and inflationary imbalances are easing in the rest of Asia, unlike the situation in Russia, Turkey and Brazil. In the euro area, Spain's good figures stand out against the continued decline of Italy and France and the unexpected drop in German GDP.

Accommodative monetary policy overcomes the summer's outbreaks of volatility. Episodes such as that of the Banco Espírito Santo and trade reprisals between Moscow and the EU countries has resulted in localised, contained outbreaks of volatility during the summer months. Nonetheless, the markets' underlying tone is still positive with stock market indices around their maximum and risk-free interest rates at a minimum. The messages being issued by the Federal Reserve and ECB in favour of prolonging the already highly accommodative monetary conditions are still a powerful support for this upward trend. At July's meeting of the Federal Open Market Committee, Janet Yellen approved the broad lines of its monetary policy and conveyed a message that suggests
a slight shift towards a gradually more restrictive position. Meanwhile, at the annual central bank symposium in Jackson Hole, her European peer repeated, even more explicitly, the ECB's commitment to resort to additional expansionary measures to combat the risk of deflation should this become necessary (inflation in the euro area fell by 0.1 percentage points in August with a cumulative drop of 0.6 percentage points for the year to date).

The US continues to grow. Thanks to improved consumption and investment, as well as an upswing in stock, in Q2 the US economy grew by 1.0% in quarter-on-quarter terms (2.5% year-on-year), data that contrast with the 0.5% quarter-on-quarter decline in Q1. On the whole, data from the National Accounts system show a pattern of growth in which domestic demand is gaining strength and all the evidence points to investment and consumption continuing to perform well in Q3. This is also suggested by the good trend in ISM business indicators and the upswing in consumer confidence in July and August, something not seen since before the crisis. The continued strength being shown by the labour market is also notable, and has not translated yet into a rise in inflationary tensions.

A disparate, middling recovery in the euro area. The weakening signs suggested by activity indicators in the last quarter have materialised with the euro area's economy standing still in Q2, putting an end to four quarters of growth at an average rate of 0.2% quarter-on-quarter. Although the breakdown in GDP by component has yet to be published, the drop in industrial confidence points to a decline in investment and exports are suffering from the weakness of world trade at the beginning of the year, as well as stronger geopolitical tensions, especially
in the Ukraine. The performance of the French and Italian economies is also hindering the progress of European activity although Germany is expected to recover some of its energy after its bad patch in Q2. These data, together with the deterioration in sentiment, PMI and consumer confidence indices in Q3, paint a rather gloomy picture
for the second half of the year.

Spain's domestic demand boosts growth. The Spanish economy has ended the summer in a stronger position, managing to avoid the disappointing growth figures in Europe as a whole. Its recovery is gradually building up steam and this is starting to be felt in the labour market, with the number of employed people rising by 402,400 and the unemployment rate falling by 1.45 p.p. in Q2. Domestic demand is also looking healthier: household consumption has grown at an average rate of 0.6% quarter-on-quarter for the last four quarters and investment has recovered strongly, particularly boosted by capital goods (+2.1% quarter-on-quarter). However, this dependence of the recovery on domestic demand is affecting the external balance. The strong upswing in imports, combined with exports losing steam, has pushed the current account balance back into negative terrain. Nor should we forget that part of this upswing in activity is being supported by temporary factors (such as decisions to consume and invest that were postponed during the crisis), and that the Spanish economy's ability to withstand a weak Europe has its limits. So our incipient optimism regarding Spain's recovery should be tinged with some caution.

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