Growth moderates in the second half of 2019. This is reflected in indicators such as the global composite Purchasing Managers’ Index (PMI), which has been in decline for the past few months and stood at a rather modest level in September (51.2 points). This is largely due to the weakening of global trade and the widespread cooling of the manufacturing sector (the manufacturing PMI index remains below the 50-point threshold that separates expansive and contractionary territory). However, the services sector remains resilient (the services PMI index remains well above the 50-point threshold), at least for now, which mitigates the slowdown in economic activity growth. This less buoyant environment is also reflected in the latest update of the IMF’s macroeconomic projections, in which the institution once again reduced its growth forecasts for the global economy in 2019 (from the 3.2% published in July down to 3.0%), for both advanced and emerging economies, and maintained the balance of risks skewed to the downside. The IMF’s downward revision largely reflects the negative impact of the protectionist measures implemented by the US and China to date, as well as the indirect negative consequences of the trade tensions between the two countries. Despite this revision, the IMF expects a slight upturn in global growth in 2020 up to 3.4% (reasonably in line with CaixaBank Research’s forecast of 3.2%), supported by the improvement in economic activity in several emerging economies.
The trade tensions remain the primary source of risk for the global economy. On the one hand, the US and China announced an agreement (as part of a first phase of negotiations), which suspended the tariff increase on Chinese imports due to be introduced on 15 October, although the details of the deal are yet to be defined. However, despite this agreement and both parties’ intention to continue the negotiations in a second phase, uncertainty will continue to weigh down on economic growth over the coming quarters (given that the negotiations have waned on more than one occasion in recent quarters, and business and consumer confidence will be restored only very gradually). On the other hand, the trade tensions between the US and the EU escalated after the World Trade Organization (WTO) ruled that the EU had given illegal aid to Airbus and, as compensation, authorized the US to introduce tariffs valued at 7.5 billion euros on a range of European products (mostly agri-food products). Despite the possibility for these tariffs to be removed at any time, their introduction (effective from 18 October) could contribute to the deterioration of economic sentiment.
In Europe, the Brexit saga continues to drag on. In particular, the British prime minister Boris Johnson and the EU reached a new agreement for the United Kingdom’s withdrawal. However, the House of Commons suspended the ratification of this agreement, insisting on the necessary legislation to make it effective being approved first. Furthermore, since no agreement was ratified by 19 October, Johnson was forced by law to ask the EU for a new Brexit extension (the third such extension), this time until the end of January 2020, albeit with the option to leave earlier if the withdrawal agreement is ratified in the coming weeks. Although this extension allays fears of a disorderly Brexit in the short term, a no deal withdrawal further down the line cannot be entirely ruled out. For instance, this could occur if the pro-Brexit parties were to win sufficient support in the forthcoming general election (which has been called early, on 12 December) so as to put the option of a hard Brexit back on the table.
Meanwhile, economic activity in the euro area holds steady. In particular, GDP growth for the euro area remained stable at 0.2% quarter-on-quarter (1.1% year-on-year) in Q3 2019, slightly above our forecasts and analysts’ consensus (0.1% quarter-on-quarter). All in all, growth remains at modest levels. This is particularly due to the weakness of industry and the foreign sector (both penalised by the slowdown in the global economy and the environment of global uncertainty brought about by the trade tensions between the US and China and the unknowns surrounding Brexit, among other factors), in addition to other idiosyncratic restrictions such as the sectoral shock in the automotive industry. All these elements are affecting Germany the most, a country for which the Q3 GDP figure has not been published yet. Among the countries for which we do have data, France performed particularly well, with growth remaining at 0.3% quarter-on-quarter in Q3 (1.3% year-on-year), as did Spain (0.4% quarter-on-quarter). In contrast, the Italian economy continued to muddle through (with growth of 0.1% quarter-on-quarter and 0.3% year-on-year).
Domestic demand continues to support economic activity in the euro area. In particular, consumers continue to benefit from a highly accommodative monetary policy stance and a healthy labour market. This is a labour market that continues to generate jobs (+1.4 million in the last year, according to data from the labour force survey for Q2 2019, reaching 147 million people in work and exceeding the peak of 2008 by almost 3 million), while the unemployment rate is at its lowest in the past 11 years (7.5% in September). In addition, the buoyancy of the labour market is gradually translating into wage growth (which reached 2.2% year-on-year in Q2 2019). In this context, consumption indicators such as retail sales continue to perform well (+2.1% year-on-year in August). However, some demand-side sentiment indicators have also begun to decline (the consumer confidence indicator developed by the European Commission fell in October down to –7.6 points, its lowest level since the beginning of 2017).
Portugal continues to perform well in a less favourable external environment
The indicators show favorable developments in activity, supported by the performance of private consumption and investment. In particular, the coincident indicator for private consumption accelerated in Q3 up to 2.4% (2 decimal points higher than in the previous quarter), driven by a solid labour market. In addition, consumer confidence indicators have steadily improved since April, fueling retail sales, which registered growth of around 5% in Q3. Meanwhile, the Bank of Portugal’s coincident economic activity indicator (which has a close correlation with GDP growth) stood at 2.2% for Q3 as a whole, only 1 decimal point lower than in the previous quarter (when GDP growth was 0.6% quarter-on-quarter and 1.9% year-on-year). However, this performance among the aggregate indicators coexists with less optimistic figures relating to industrial activity (affected by more moderate global growth and lower foreign demand) and investment. In fact, with data up to August, the coincident indicator for investment suggests that investment will slow down to around 4%-5% in Q3 (its growth stood above 7% in Q2). On the other hand, the slowdown in global economic activity makes the external environment more demanding and will contribute to a moderation in the Portuguese economy’s growth rate over the coming quarters.
The current account deficit is smaller than expected. Following a statistical review of the external accounts, which involved a change to the base year (2016) and the incorporation of more information on tourism activity, e-commerce and, above all, income balance flows (with the addition of a greater number of pensions received by foreign pensioners residing in the country), the new series show that the current and capital account balance stood at 1.4% of GDP in 2018 (1 pp higher than previously estimated). This review has also modified the data for the current and capital account balance relating to 2019. Specifically, in July the current account deficit stood at –0.7% of GDP (versus the –1.1% initially estimated), while in August the deficit moderated slightly down to –0.5% (1.1 billion euros, in 12-month cumulative terms). After these changes, the current account balance is expected to register a deficit of 0.7% of GDP in 2019-2020, while the current and capital account balance is expected to register a surplus of 0.2% of GDP in the same period.
Mixed data in the real estate market. Although the housing price index accelerated in Q2 up to 10.1% year-on-year (9.2% in Q1), and despite the boost to the sector provided by the accommodative financial environment supported by the ECB, other indicators paint a less rosy picture and indicate a potential slowdown in prices over the coming quarters. In particular, the real estate market confidence indicator (developed by Confidencial Imobiliário using information from real estate agencies) shows a declining trend since the beginning of 2018. Furthermore, the indicators for property sales in negotiation and customer enquiries (also produced by Confidencial Imobiliário) have registered a decline in recent months, and for the first time since 2013 they have stood at levels that indicate a contraction in activity.
The labour market shows signs of maturity. The data for September (still preliminary) indicate job growth of 1.0% year-on-year (seasonally adjusted), albeit with a level of employment still below the figures achieved in 2008. The unemployment rate, meanwhile, rose in September to 6.6% (+0.2 pps compared to August) due to an increase in the labour force (1.0% year-on-year), with a notable contribution from foreign workers. The labour market is thus displaying a more moderate performance than in previous quarters, consistent with the country’s entry into a more mature phase of the cycle.
The budget execution remains on a path of consolidation. The total general government balance registered a surplus of 1.6% of GDP in September (2,542 million euros), which represents a +0.9% improvement over the same period last year. This trend was due to the good performance of revenues (4.8%), as well as to the lower growth of expenditure (2.9%). Of particular note on the revenues side was the growth in Social Security contributions and in VAT revenues (7.1% and 7.3%, respectively). On the other hand, the reduction of the interest burden (–7.8% year-on-year) and the lower growth in investment (5.1%, compared to the 31.2% forecast by the government for the year as a whole) explain the lower increase in expenditure. As such, the general government deficit for the year as a whole could end up being lower than expected. Indeed, in the Budget Plan submitted to Brussels on 15 October, the government estimates a deficit of 0.1% of GDP in 2019 and of 0.0% in 2020.
Non-performing loans continue to decline. The NPL ratio of the non-financial private sector fell to 9.2% in Q2, 0.7 pps lower than in Q1 and 9.3 pps lower than the high-point registered in Q2 2016. This reduction can be explained by the sales of non-performing loan portfolios and the strong performance of the Portuguese economy, which facilitates lower levels of bad debt. Specifically, non-performing loans fell by 851 million euros compared to the previous quarter, mostly thanks to the non-financial corporation segment (–653 million euros). However, the NPL ratio in this segment remains high (16.6%). The stock of loans to the private sector, meanwhile, continued to contract in August (–1.4% year-on-year) as a result of the contraction in loans to non-financial corporations (–2.9% year-on-year) and to households (–0.5%).