Financial headwinds in the world economy

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March 10th, 2016

Sentiment improves in the financial markets. After a turbulent start to the year in financial markets the mood has calmed down over the last few weeks. The announcement of various monetary measures of an expansionary nature in China and the first attempts by large oil producers to come to an agreement on a possible reduction in supply have helped to improve investor sentiment. However, in spite of this containment of financial deterioration, the intensity and duration of the episode has started to be felt in the real economy, glimpses of which can be seen in the decline in economic sentiment indicators. If we add to these the fact that, in many advanced and emerging economies, the end of 2015 was somewhat weaker than expected, we might expect world growth in 2016 to be rather less expansionary than had been predicted previously.

A moderate adjustment in the outlook. In particular, as a consequence of the downward revision of growth for 2016 in the US , Japan, the euro area and some emerging countries (such as Mexico and Indonesia) and the expected intensification of Brazil's recession, we believe that global growth will be 3.4% in 2016 compared with our previous forecast of 3.5%. This is therefore a moderate adjustment that still implies the world economy will speed up its rate of growth compared with 2015. In this scenario the group of emerging economies will grow by 4.4% in 2016 and the advanced economies by 1.9%. The global expansion will liven up in 2017 thanks to the improved tone in the emerging countries and, to a lesser extent, the advanced. Although global growth will be less than expected, the likelihood of a scenario occurring in which the ever-present high downside risks actually occur (including a hypothetical worsening of financial uncertainty, difficulties in ensuring a soft landing for the Chinese economy or further deterioration in the fragile situation of emerging countries such as Brazil, Russia, South Africa and Turkey) does not change regarding our prediction last month.

Expansion in the US and euro area will take a bit longer. Growth in 2015 Q4 was identical in the US and the euro area (0.3% quarter-on-quarter). Both economies also share a less expansionary start to the year than expected and the pattern of growth expected for the year as a whole is also similar, with their expansion being postponed to the second half. Here the similarities end, however. The US is going through a more mature phase of the economic cycle than the euro area, as endorsed by the duration of the expansion, the strength of its labour market and its higher inflation. Their respective monetary policies are not alike either. Although the Federal Reserve will probably wait longer than expected to continue its monetary normalisation, this is merely a postponement. However, in response to the deterioration in inflation expectations and sensitive to the increase in financial and economic uncertainty, the ECB has opened the door to relaxing its monetary policy even further in March.

Spain continues in the fast lane. Given this situation of a slight decline in the international situation, the Spanish economy is exhibiting a surprisingly positive outlook. While the euro area grew by 0.3% quarter-on-quarter in Q4, Spain recorded a noticeably higher advance of 0.8%; and while the recovery has been delayed in other single currency countries, here its growth forecast for 2016 has remained unchanged. This contrast results from a combination of global factors that especially benefit our country (in particular low oil prices, providing savings in the energy bill equivalent to 1.3% of GDP in 2015) but also to the trend in aspects of a domestic nature. For example the good tone of the labour market and the absence of inflationary pressures continue to support consumption. The recovery in the real estate sector, reflected both in the trend in transactions as well as in prices, is underpinning the trend in construction investment. As has also been the case with capital goods investment, this has benefitted from the clear recovery in the flow of new loans to the economy. Of course many of these factors are the result of the intense processes of adjustment and reforms carried out over the last few years (gains in competitiveness, deleveraging of households and companies, healthier bank balance sheets, etc.). If the Spanish economic environment ends up taking a more sombre path than we currently expect, then it will be even more vital to continue with such ambitious reforms. But even if this episode of lower world growth turns out to be temporary, work must continue on the agenda of economic modernisation and regeneration in order to remain on track to achieve high but sustainable growth.