Economic Outlook


  • Spain fairs better than the euro area in the current slowdown

    The Spanish economy’s GDP grew by 0.5% quarter-on-quarter in Q2 (2.3% year-on-year). Second quarter growth was 1 decimal point lower than that of Q1, but notably higher than that of the main European economies. In the breakdown by component, the biggest surprise was the positive contribution of the foreign sector (especially given the deterioration of the international environment seen in recent quarters). Private consumption, meanwhile, continued its gradual slowdown (0.3% quarter-on-quarter, 1.7% year-on-year), consistent with a scenario in which consumers are moderating their rate of spending following several years in which decisions postponed during the financial crisis finally materialised (fading of the dammed-up consumption effect). On the other hand, investment fell by 0.2% quarter-on-quarter and its year-on-year growth slowed significantly (1.2%, after registering 4.7% in Q1). This weakness was mostly due to the fall in investment in capital goods (–2.6% quarter-on-quarter, –1.5% year-on-year), given that investment in residential construction rose by 1.3% quarter-on-quarter. While this decline may in part reflect a natural moderation following the significant growth of Q1 (7.2% year-on-year), these investment figures are closely linked to the persistent weakness exhibited by the industrial sector and cast some uncertainty over the outlook for aggregate demand which, in general, remains positive.

    Foreign demand was higher than expected in Q2. After a modest (and even negative) contribution in previous quarters, in Q2 foreign demand contributed +0.7 pps to year-on-year GDP growth. This improvement was not only supported by the weakness of imports, which grew by 1.0% quarter-on-quarter, but also by the recovery of exports, which increased by 1.8%. This figure was particularly encouraging given the current context of significant global trade tensions and the slowdown in the growth of the euro area. Looking ahead to the coming quarters, however, we expect the deterioration of the international environment to continue to weigh down on the foreign sector and external demand to provide more contained contributions to growth.

    The economic activity indicators suggest a gentle slowdown. In July, the PMI services index stood at 52.9 points, following a gently decelerating trend (7 decimal points less than in June and 11 less than in December 2018) but still comfortably within expansive territory (above 50 points). This resilience in services, coupled with encouraging private consumption indicators (retail sales, +3.2% year-on-year in July), demonstrates the sector’s resilience in the face of the slowdown in global manufacturing that is also affecting the indicators for Spain. In particular, the manufacturing PMI shows a more marked slowdown than that of services, and in June and July it fell into clearly contractive territory (47.9 and 48.2 points, respectively). Industrial production, meanwhile, grew by 1.8% year-on-year in June (1.4% in May). While this is not enough to rescue the industrial sector from its current predicament, it does qualify the slowdown. Considering all the economic activity indicators available to date, GDP growth in Q3 should stand at levels similar to those of Q2 (0.5% quarter-on-quarter). However, the reduction of the outlook for the European and global economies set out in this very Monthly Report leads us to lower our forecasts for Spain’s GDP growth by between 0.1 and 0.2 pps (from 2.3% to 2.2% in 2019 and from 1.9% to 1.7% in 2020).

    The labour market also indicates moderation. Following a first half of the year with a gentler-than-expected slowdown, the data for July point towards a more marked slowdown in employment, albeit still within a context of relative strength. The number of workers affiliated with Social Security increased by 4,334 between June and July (seasonally adjusted data),

  • Europe, the main victim of the uncertainty shock

    The uncertainty shock shows no sign of abating. Over the summer months, far from providing a respite, the main pockets of uncertainty of recent times have remained active: the trade tensions between the US and China have intensified, the EU’s political troubles (Italy, Brexit) have not been dispelled and the global geopolitical situation has been cause for alarm (notably the difficult circumstances in Hong Kong and Iran, among others). Furthermore, these dynamics have been compounded by volatility in financial markets and indicators which, generally speaking, have confirmed that the rate of economic activity is somewhat worse than a few months ago. This is a combination that has resulted in an intensification of doubts over the future path of global growth, and the risk of the latter being lower than expected has increased.

    Escalation of trade tensions between the US and China. Among the open fronts mentioned above, the one with the biggest implications for the global economy is the increase in the trade skirmishes between the world’s two leading economies, which are trading tit for tat. On 1 August, just when negotiations appeared to be at a more constructive point, the US made a surprise announcement that it would apply a 10% tariff on 300 billion dollars of Chinese imports (which would partially come into force in September and fully in December). Shortly thereafter, China responded by applying various tariffs, ranging from 5% to 10% depending on the product, on 75 billion dollars of US imports. In addition, the Chinese giant allowed the renminbi to devaluate down to around 7 yuan per dollar. On 23 August, the US government announced a 5-pp increase (from 25% to 30%) on tariffs already in force on another 250 billion dollars of Chinese imports, making practically all US purchases from China now subject to tariffs that did not exist a year and a half ago. In short, although the two parties are expected to reach a basic agreement, probably in 2020, the uncertainty is already taking its toll and that hypothetical agreement is unlikely to recover the eroded confidence in full.

    Expectations of lower future growth are beginning to spread. In this situation, most analysts and institutions have begun to revise their growth forecasts for 2019 and subsequent years downwards. A prime example of this is that, in July, the IMF once again reduced its global growth forecasts and reiterated the significant risks surrounding the global economy. Specifically, having grown by 3.6% in 2018, according to the Fund the global economy is expected to grow by 3.2% in 2019 and by 3.5% in 2020, both 1 decimal point lower than the figures included in its April forecasts. This downward revision was the result of growth in emerging economies being lower than predicted three months ago, the intensification of trade tensions, as well as the uncertainty surrounding Brexit and technological risks (with the various measures that the US could adopt in relation to Chinese companies and the multiple investigations underway on potential anti-competitive practices by some US technological giants). After the spike in uncertainty in August, these figures even appear somewhat optimistic. Accordingly, at CaixaBank Research we anticipate that growth will be 3.0% in 2019 and 3.2% in 2020, 2 decimal points lower than predicted in our previous Monthly Report.

    Europe, the main victim of the uncertainty shock. While the main trade conflict is between the US and China, for the time being it is the European countries that, paradoxically, seem to be more affected by the increase in uncertainty.

  • The global economy: no respite in the uncertainty

    The uncertainty shock shows no sign of abating. Over the summer months, far from providing a respite, the main pockets of uncertainty of recent times have remained active: the trade tensions between the US and China have intensified, the EU’s political troubles (Italy, Brexit) have not been dispelled and the global geopolitical situation has been cause for alarm (notably the difficult circumstances in Hong Kong and Iran, among others). Furthermore, these dynamics have been compounded by volatility in financial markets and indicators which, generally speaking, have confirmed that the rate of economic activity is somewhat worse than a few months ago. This is a combination that has resulted in an intensification of doubts over the future path of global growth, and the risk of the latter being lower than expected has increased.

    Escalation of trade tensions between the US and China. Among the open fronts mentioned above, the one with the biggest implications for the global economy is the increase in the trade skirmishes between the world’s two leading economies, which are trading tit for tat. On 1 August, just when negotiations appeared to be at a more constructive point, the US made a surprise announcement that it would apply a 10% tariff on 300 billion dollars of Chinese imports (which would partially come into force in September and fully in December). Shortly thereafter, China responded by applying various tariffs, ranging from 5% to 10% depending on the product, on 75 billion dollars of US imports. In addition, the Chinese giant allowed the renminbi to devaluate down to around 7 yuan per dollar. On 23 August, the US government announced a 5-pp increase (from 25% to 30%) on tariffs already in force on another 250 billion dollars of Chinese imports, making practically all US purchases from China now subject to tariffs that did not exist a year and a half ago. In short, although the two parties are expected to reach a basic agreement, probably in 2020, the uncertainty is already taking its toll and that hypothetical agreement is unlikely to recover the eroded confidence in full.

    Expectations of lower future growth are beginning to spread. In this situation, most analysts and institutions have begun to revise their growth forecasts for 2019 and subsequent years downwards. A prime example of this is that, in July, the IMF once again reduced its global growth forecasts and reiterated the significant risks surrounding the global economy. Specifically, having grown by 3.6% in 2018, according to the Fund the global economy is expected to grow by 3.2% in 2019 and by 3.5% in 2020, both 1 decimal point lower than the figures included in its April forecasts. This downward revision was the result of growth in emerging economies being lower than predicted three months ago, the intensification of trade tensions, as well as the uncertainty surrounding Brexit and technological risks (with the various measures that the US could adopt in relation to Chinese companies and the multiple investigations underway on potential anti-competitive practices by some US technological giants). After the spike in uncertainty in August, these figures even appear somewhat optimistic. Accordingly, at CaixaBank Research we anticipate that growth will be 3.0% in 2019 and 3.2% in 2020, 2 decimal points lower than predicted in our previous Monthly Report.

    US

    The economy keeps up the pace... for now. US GDP growth slowed in Q2, although it continues to expand at a considerable rate. In particular, US economic activity grew in Q2 2019 by 0.5% quarter-on-quarter (2.1% annualised quarter-on-quarter,

  • The fear of a recession taints the summer

    The pessimism of the markets shakes the calm summer season. Far from a quiet summer, the intensification of trade and geopolitical tensions described on the following pages of this report resulted in concern in the financial markets over the global economic outlook and led to an increase in risk aversion. This episode ended with setbacks in the stock markets, an increase in risk premiums on poorer-quality corporate debt and a flight towards safe-haven assets. This, in turn, drove the main sovereign yields down even more and led to capital outflows from the emerging economies (the biggest since November 2016, according to data from the Institute of International Finance). In addition, the exchange of tariff threats between the US and China was accentuated by the depreciation of the renminbi, which crossed the 7 yuan per dollar threshold for the first time since 2008. In this context of concern, investors’ attention turned to the Fed and the ECB with the implicit expectation that they would adopt a broadly accommodative monetary policy over the coming quarters. Both return to the stage in September, when they will have to find a way to balance, on the one hand, the restlessness of prices in the financial markets and the intensification of uncertainty with, on the other hand, economic indicators which, despite having slowed down, do not seem to paint such a negative picture as that which shook the markets in summer.

    The stock markets suffer corrections but recover. The escalating trade tensions between the US and China shook international stock markets, and in the first week of August the main indices amassed losses of over 5% and registered the worst sessions of the year. This initial anxiety gave way to an erratic tone in the closing weeks of August, with a combination of recoveries (based on conciliatory statements) and renewed setbacks. This, coupled with the more placid performance in July, allowed the trading floors to moderate the losses over the course of July and August as a whole, both in the US (S&P 500 –0.5%) and in Europe (Eurostoxx 50 –1.4%, DAX –3.7%, CAC –1.1%, MIB +0.4%, Ibex –4.2% and PSI –4.9%). However, in both regions, market prices in the «cyclical» sectors (i.e. those that are more sensitive to the business cycle) were hit notably harder than in the «defensive» sectors (in which earnings growth is not so sensitive to the cycle), reflecting the doubts over growth generated by the trade tensions. The emerging economies, meanwhile, ended up with more marked setbacks (Emerging Asia and Latin America MSCI indices: –5.9% and –8.5%, respectively).

    Fears of recession are concentrated in the fixed-income markets. Whereas stock prices remain relatively high (especially in the US) despite the corrections of the summer, sovereign yields reflect a bleaker outlook. While in the previous Monthly Report we pointed out that US and German rates had decreased to low points, during the course of the summer they have continued to decline (–51 and –37 bps, respectively) in view of the fear of a deterioration in the economy and the expectation of easier monetary policies. Furthermore, in the US the inversion of the yield curve was accentuated, with a 10-year sovereign debt yield lying some 50 and 5 bps below the 3-month and 2-year yields, respectively (which, historically, has been an indicator of the onset of a recession, as discussed in the note «On the inversion of the yield curve: a prelude to recession?» available at www.caixabankresearch.com). In Europe, meanwhile, risk premiums remained contained and the reduction in sovereign

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