Macroeconomic acceleration; on hold financially

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June 10th, 2016

Although the world economy continues to expand, financial markets are still waiting for more definite signs. In May the relative dissonance continued between macroeconomic indicators that are tending to point to a progressive acceleration in growth as the year progresses and developments in the financial markets, which have yet to find solid ground. Although the macroeconomic context is still reasonably positive, the financial markets have put on hold the episode of gains in risk asset prices that began mid-February. So what is weighing so heavy on investor sentiment? Probably several important events occurring in June, a month that will decide whether the United Kingdom will remain in the EU and in which the Fed's meeting has come to the fore after the unexpectedly tough tone (for a large proportion of investors) given off by the minutes of April meeting, fuelling expectations of another interest rate hike in June. Our scenario in this respect is clear: although the probability of Brexit is not low, we expect the British referendum to be won by the Remain camp, and we also believe that the US macroeconomic conditions more than justify an interest rate hike. Nonetheless it is natural for investors to play the waiting game, although such valid caution should not entertain any serious doubts regarding the macroeconomic scenario.

In global macroeconomic terms, May ended with continued expansion in activity. Particularly encouraging were the figures confirming that the US is still growing at an acceptable cruising speed (in the zone of 2% year-on-year, a rate it has achieved thanks to a strong labour market, almost in a situation of full employment), that Europe is gradually speeding up its growth rate and that China, in spite of the variability of its indicators, remains on course for a soft landing. There were also some positive surprises, such as higher growth than expected in Japan (advancing by 0.4% quarter-on-quarter in Q1 compared with 0.0% in the previous quarter) and the first signs that Russia might now be leaving the worst of the recession behind it, although its outlook is definitely not risk-free. Certainly other sources of uncertainty remain, such as Brazil's unpredictable political crisis (which has not stabilised in spite of suspending its President) and the doubts regarding countries with imbalances, such as Turkey and South Africa, which could be hard hit by an interest rate hike by the Fed. But the overall situation is that of the global economy fulfilling expectations and growing by around 3.3% in 2016, slightly more than 2015's figure of 3.1%.

The euro area is en route to 1.6% in 2016. As we have already mentioned, Europe is still progressively speeding up its rate of activity. In 2016 Q1 quarter-on-quarter growth was 0.5% (1.5% year-on-year) thanks fundamentally to the push provided by Spain, Germany and France. This is a positive figure considering that it is occurring at a time when certain factors that had provided a temporary boost for activity are starting to weaken (in particular cheaper oil). In any case Europe's economy has built up enough steam to accelerate even without such a strong tailwind. This is what the European Commission expects, for example, predicting 1.6% growth in 2016 and 1.8% in 2017, a scenario similar to the one provided by CaixaBank Research. Given this situation of recovery, inflation will also tend to move away from the abnormally low levels of 2015, something that will be particularly visible in 2017.

Domestic demand is supporting Spain's recovery. The Spanish economy continues to enjoy a positive moment in the cycle. Growth stood at 0.8% quarter-on-quarter (3.4% year-on-year) in 2016 Q1, the same rate of activity as in the last two quarters. Domestic demand is still the driver for this expansion, contributing the most to GDP growth thanks to the boost from private consumption and investment, while the foreign sector also slightly reduced its negative contribution to GDP growth posted in preceding quarters. This good start to the year endorses our macroeconomic scenario which predicts GDP growth of 2.8% in 2016, representing a slight slowdown compared with the rate of 3.2% in 2015. This gentle deceleration is the result of a decline in some temporary support factors for activity that had a strong effect last year, such as the aforementioned cheaper oil. In 2017 growth will reach 2.4%. In short, the economy is moving towards more mature phases of the cycle but its activity is still at a substantial level. A favourable situation which needs to be maximised to continue with the country's fiscal consolidation and push forward with the agenda of structural reforms that are still pending. Because, as we are reminded by recent economic history, an unwillingness to reform during boom periods entails higher social costs at times of economic adversity.