Economic Outlook


  • The expansion continues at a moderate pace

    The global economy is advancing at a more moderate rate. This is reflected in indicators such as the global composite Purchasing Managers’ Index (PMI), which has remained slightly above 52 points for the past few months (52.1 points in April), a level below the 53.6-point average for 2018, but still safely above the 50-point threshold that separates the expansionary territory from that of contraction. Thus, indicators confirm CaixaBank Research’s macroeconomic scenario, which predicts a mild slowdown in global growth (from 3.6% in 2018 to 3.3% in 2019). Part of this moderation responds to temporary restrictions in some key economies (especially in the euro area), meaning that economic activity could improve as the year progresses. Nevertheless, as the following paragraphs on this month’s economic outlook point out, the current environment is demanding and major sources of uncertainty prevail.

    Trade negotiations between the US and China are stuck. In particular, just when it seemed that the US and China were close to reaching an agreement to steer their trade conflict towards a satisfactory conclusion, in May tensions raised again. On the one hand, the US announced a 10% tariff rise, bringing the rate up to 25% on Chinese imports worth 200 billion dollars, after which China responded with tariffs on 60 billion of imports from the US. Furthermore, Trump threatened to impose another round of tariffs (at 25%) on a further 300 billion of imports from China, which would cover the total value of Chinese goods imported annually by the US (see second chart). On the other hand, the escalation of tensions went beyond tariffs after the US added Huawei to the list of businesses requiring government “authorisation” to procure components and technology from the US. Without a doubt, these developments put pressure on China to strive harder to meet some of the US’ demands on technology transfer and intellectual property before a trade agreement can be reached – something which today seems unlikely to happen in the immediate future. However, they also underline the risk of tensions between the two countries continuing for longer than initially expected. In addition, the US postponed its decision on tariff measures in the automotive sector until the end of the year, which would particularly affect Europe.

    In Europe, pockets of political uncertainty persist. On the one hand, although the European Parliament election resulted in a greater proportion of votes for Eurosceptic parties, support for them was lower than some analysts predicted and their share of parliamentary voted failed to reach the threshold needed to have a material influence on the political and institutional course of the EU. On the other hand, in the United Kingdom, the prime minister Theresa May announced her resignation, with effect from 7 June. Following her resignation, the Conservative Party leadership contest will begin and could extend into the summer. This will add to the existing difficulties to reach a consensus strategy on Brexit in the House of Commons before the new deadline of October 31.

    The expansion continues at a moderate pace. Despite higher than expected growth in Q1 (0.4% quarter-on-quarter and 1.2% year-on-year), euro area growth will remain at moderate levels (slightly above 1.0% year-on-year), in the context of a slowdown in global economic activity that is particularly affecting trade and manufacturing. This is reflected in the latest update of the economic scenario by the European Commission. In particular, in its spring forecast update, the institution downgraded its growth forecast for the euro area for 2019 by 1 decimal point, down to 1.2%, and down to

  • The global expansion continues in an environment of uncertainty

    The global economy is advancing at a more moderate rate. This is reflected in indicators such as the global composite Purchasing Managers’ Index (PMI), which has remained slightly above 52 points for the past few months (52.1 points in April), a level below the 53.6-point average for 2018, but still safely above the 50-point threshold that separates the expansionary territory from that of contraction. Thus, indicators confirm CaixaBank Research’s macroeconomic scenario, which predicts a mild slowdown in global growth (from 3.6% in 2018 to 3.3% in 2019). Part of this moderation responds to temporary restrictions in some key economies (especially in the euro area), meaning that economic activity could improve as the year progresses. Nevertheless, as the following paragraphs on this month’s economic outlook point out, the current environment is demanding and major sources of uncertainty prevail.

    Trade negotiations between the US and China are stuck. In particular, just when it seemed that the US and China were close to reaching an agreement to steer their trade conflict towards a satisfactory conclusion, in May tensions raised again. On the one hand, the US announced a 10% tariff rise, bringing the rate up to 25% on Chinese imports worth 200 billion dollars, after which China responded with tariffs on 60 billion of imports from the US. Furthermore, Trump threatened to impose another round of tariffs (at 25%) on a further 300 billion of imports from China, which would cover the total value of Chinese goods imported annually by the US (see second chart). On the other hand, the escalation of tensions went beyond tariffs after the US added Huawei to the list of businesses requiring government “authorisation” to procure components and technology from the US. Without a doubt, these developments put pressure on China to strive harder to meet some of the US’ demands on technology transfer and intellectual property before a trade agreement can be reached – something which today seems unlikely to happen in the immediate future. However, they also underline the risk of tensions between the two countries continuing for longer than initially expected. In addition, the US postponed its decision on tariff measures in the automotive sector until the end of the year, which would particularly affect Europe.

    In Europe, pockets of political uncertainty persist. On the one hand, although the European Parliament election resulted in a greater proportion of votes for Eurosceptic parties, support for them was lower than some analysts predicted and their share of parliamentary voted failed to reach the threshold needed to have a material influence on the political and institutional course of the EU. On the other hand, in the United Kingdom, the prime minister Theresa May announced her resignation, with effect from 7 June. Following her resignation, the Conservative Party leadership contest will begin and could extend into the summer. This will add to the existing difficulties to reach a consensus strategy on Brexit in the House of Commons before the new deadline of October 31.

    US

    The indicators point to a lower rate of growth in Q2. In particular, GDP Nowcasting models of the various federal reserves place growth for Q2 between 1.0% and 1.5% (in annualised quarter-on-quarter terms). This confirms that, beyond the surprise of Q1 (3.1% annualised quarter-on-quarter growth, supported by short-term factors such as inventories), the US economy is moving towards a gradual moderation in its growth rate due to the very maturity of the cycle and the fading of the fiscal stimulus. All in all, with one month to go until the

  • The slowdown in Spain materialises at a gentler pace

    The Spanish economy postpones its growth slowdown. With the fading of the tailwinds that supported the strong growth of recent years, the Spanish economy faces a transition to more moderate growth rates that are more consistent with the maturity of the cycle. However, this moderation of growth is occurring somewhat slower than expected. For instance, in Q1 GDP grew by 0.7% quarter-on-quarter (2.4% year-on-year), 0.1 pp faster than in the previous quarter. For 2019 as a whole, we expect the Spanish economy to grow by 2.3% (2.6% in 2018), before slowing down to 1.9% in 2020 and 1.7% in 2021. In terms of components, domestic demand will remain the main driver of growth in Spain, especially due to the contributions of domestic consumption and investment. Foreign demand, meanwhile, has been penalised in recent quarters by trade tensions and lower growth in the euro area, and it will probably continue to make a modest contribution while these restrictions continue to weigh down the external environment. A very similar growth scenario can be found in the Government’s macroeconomic table, presented in the update of the Stability Plan for 2019-2022. As for the public accounts, the Stability Programme foresees a very gradual reduction of the budget deficit, supported by the cyclical momentum and the new revenue measures that are due to be included in the budgets for 2020. These measures (minimum taxation for corporation tax, digital services tax, tax on financial transactions, etc.) would allow revenues to be increased from 39.1% of GDP in 2019 to 40.7% in 2022, although the details are still too patchy to assess their impact with precision.

    The indicators suggest that the growth rate remains steady. In particular, in March, the turnover of the services sector grew by 5.1% year-on-year (three-month moving average) and that of the industrial sector, by 2.2% year-on-year, both higher than in the previous month. In addition, in April the manufacturing and services PMIs stood at 51.8 and 53.1 points, respectively, well within expansionary territory (above 50 points). As such, we expect GDP growth in the second quarter of the year to remain similar to that of Q1. Specifically, our short-term GDP forecast model indicates growth of 0.7% quarter-on-quarter in Q2 2019.

    The labour market shows dynamic performance. In the same vein as GDP, in the labour market the anticipated moderation in the growth of employment also continues to be pushed back. In April, employment rose by 2.95% year-on-year (in seasonally adjusted terms), somewhat above the Q1 average (2.9%). The total number of registered workers affiliated to Social Security, meanwhile, reached 19.2 million, the highest figure since July 2008. Registered unemployment fell by 5.2% year-on-year (the same rate as the average for Q1) and the total number of unemployed people stood at 3.2 million. In addition, besides this improvement in employment we are beginning to observe a gradual increase in workers’ earnings, which should help to underpin the recovery of household incomes and economic sentiment among consumers. In particular, in April, the wage increase agreed in collective labour agreements was 2.21% (2.25% in new agreements signed in 2019), higher than the 1.75% registered in December 2018.

    Inflation remains contained. Specifically, in May headline inflation stood at 0.8% year-on-year. As such, there was a reversal of the upswing seen in April (when it had increased to 1.5%), a figure that was influenced by calendar effects related to Easter. With regard to core inflation, we still do not know the figure for May, but in April it remained at a contained 0.9% and

  • Risk aversion takes hold among investors

    Trade tensions destabilise the financial markets. Breaking with the relative calm that had dominated the financial scenario during the first few months of the year, in May risk aversion took hold in the global markets. The optimism among investors seen in the previous months – supported by the trade tensions being steered in the right direction, the easing off on the tightening of monetary policy by the major central banks and favourable economic data – made an about turn when the US Administration announced a tariff hike on Chinese imports. This announcement, which surprised the market, led investors to reassess their expectations and aroused fears that the trade tensions will have a higher price in terms of economic growth. Thus, it resulted in a surge in volatility and risk aversion, which increased the preference for safe haven assets (such as US and German sovereign debt, the dollar and gold). On the other hand, in this context of greater uncertainty the central banks maintained their messages of patience, reiterated their intention not to tighten monetary policy in the near future and offered a relatively positive view of the macroeconomic environment in the medium term, noting, however, that the risks continue to be biased to the downside.

    The stock market staggers. During the first four months of the year, investor optimism had resulted in substantial gains in the stock markets (+15.6% in the MSCI global index). In May, however, the tables turned. The rebound in trade tensions between the US and China, coupled with the publication of economic activity data confirming that the global economy is growing at a more moderate pace, diminished investor sentiment. Such was the importance assigned to these aspects by investors that little attention was paid to the positive surprises of the Q1 business profits season in the major economies (led by the consumption and technology sectors). Thus, in an environment of greater uncertainty and volatility, the losses were spread across the global equity markets and the S&P 500, the EuroStoxx 50 and the MSCI index for the emerging markets bloc fell by around 7%. By region, the losses were particularly significant in the Asian stock markets, and the MSCI index for emerging Asia fell by around 9%. In Latin America, meanwhile, the stock markets moved more to the sound of factors specific to the region and the MSCI index for Latin America fell by less than 2.5%.

    Sovereign yields reach a low point. In the fixed income markets, the heightened risk aversion resulted in a shift in the preferences of investors, who opted for safer assets such as US and German sovereign debt. This drove down both economies’ 10-year sovereign debt yields, which reached a two-year low in the case of US treasury and a three-year low in that of the bund (which once again fell into negative territory). In addition, the US sovereign yield curve inverted once again, with the 10-year yield falling below that of 3 months (which has traditionally been an early signal of recession, although there is reason to believe that this time may be different, as we have analysed in previous publications). On the other hand, risk premiums in Spain and Portugal reduced, albeit to a lesser extent than in April, bringing the yield on 10-year bonds to an all-time low and ending the month below 0.80% and 0.90%, respectively. In Italy, in contrast, the rise in tensions surrounding the government’s fiscal policy and the contradictory statements in this regard drove the country’s risk premium upwards.

    The dollar remains

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