Economic Outlook


  • Economic activity moderates in Q2

    Slight deterioration of the global macroeconomic scenario. On the one hand, the Q1 growth data for some of the major emerging economies (India, Brazil and Turkey) proved somewhat worse than expected, leading us to slightly reduce our growth forecast for 2019 (from 3.3% to 3.2%) and confirming that the global economy will shift down a gear this year (considering that in 2018 growth stood at 3.6%). On the other hand, we have seen a significant deterioration in the global sentiment indicators in Q2: the global PMI composite indicator fell to 51.2 points in May (52.1 in April), while the manufacturing index stood below 50 points (the threshold that separates the expansive and recessive territories). Thus, the data indicate that global economic activity has embarked on a somewhat weaker path, affected by greater global uncertainty.

    Heightened uncertainties. One of the main reasons we assign a greater likelihood of the downside risks materialising is the fact that the protectionist tensions between the US and China reappeared in May and, as suggested by all the indicators, this time are here to stay. As such, the global economy remains on high alert, as demonstrated by the spike in the geopolitical risk indices. This is despite the tempering of the situation in the short term, as trade negotiations resumed following the meeting between Trump and Xi Jinping at the G-20 summit in Osaka in late June. Therefore, although some form of agreement between the two powers can be expected, it is unlikely to be an ambitious one. In addition, there are two reasons that reinforce the view that uncertainty has come to stay. Firstly, there is a significant risk that, in the end, no such agreement will be reached: underlying disagreements remain unresolved and China has published a white paper in which it rejects having taken advantage of forced technology transfers, one of the key points of the litigation. The second reason is that, even if an agreement is reached, uncertainty will not fade overnight: the tariffs imposed are unlikely to be withdrawn immediately and, in a conflict as complex and with so many edges as this one, some latent pockets of uncertainty will persist. If these risks materialise, the slowdown could prove much more abrupt than we expect, largely due to the indirect effects of heightened uncertainty. In particular, both China and the US would pay a heavy toll in terms of growth (for exact figures, see the Focus «The threat of protectionism in the global economy» in this same Monthly Report).

    In Europe, political uncertainty rises once again. On the one hand, if the Italian government fails to present a credible fiscal plan in July, the European Commission is likely to recommend to the European Council to impose an excessive deficit procedure (EDP) on the country. This would oblige the Italian cabinet to include adequate adjustment measures in its budget for 2020, which is to be presented by mid-October 2019, in order to streamline the national accounts but without harming economic growth, which is already scarce. The negotiations between Rome and Brussels will be drawn out (the EDP is essentially a gradual, political process which offers a lot of leeway for affected countries to take corrective measures), but the tensions are likely to gain prominence over the coming months. Furthermore, the Italian government still has the option to call new elections at the end of the year, which could lengthen the whole process and intensify the conflict. In the United Kingdom, the situation is not looking much brighter: Boris Johnson

  • The global expansion continues, but the risks are amplified

    Slight deterioration of the global macroeconomic scenario. On the one hand, the Q1 growth data for some of the major emerging economies (India, Brazil and Turkey) proved somewhat worse than expected, leading us to slightly reduce our growth forecast for 2019 (from 3.3% to 3.2%) and confirming that the global economy will shift down a gear this year (considering that in 2018 growth stood at 3.6%). On the other hand, we have seen a significant deterioration in the global sentiment indicators in Q2: the global PMI composite indicator fell to 51.2 points in May (52.1 in April), while the manufacturing index stood below 50 points (the threshold that separates the expansive and recessive territories). Thus, the data indicate that global economic activity has embarked on a somewhat weaker path, affected by greater global uncertainty.

    Heightened uncertainties. One of the main reasons we assign a greater likelihood of the downside risks materialising is the fact that the protectionist tensions between the US and China reappeared in May and, as suggested by all the indicators, this time are here to stay. As such, the global economy remains on high alert, as demonstrated by the spike in the geopolitical risk indices. This is despite the tempering of the situation in the short term, as trade negotiations resumed following the meeting between Trump and Xi Jinping at the G-20 summit in Osaka in late June. Therefore, although some form of agreement between the two powers can be expected, it is unlikely to be an ambitious one. In addition, there are two reasons that reinforce the view that uncertainty has come to stay. Firstly, there is a significant risk that, in the end, no such agreement will be reached: underlying disagreements remain unresolved and China has published a white paper in which it rejects having taken advantage of forced technology transfers, one of the key points of the litigation. The second reason is that, even if an agreement is reached, uncertainty will not fade overnight: the tariffs imposed are unlikely to be withdrawn immediately and, in a conflict as complex and with so many edges as this one, some latent pockets of uncertainty will persist. If these risks materialise, the slowdown could prove much more abrupt than we expect, largely due to the indirect effects of heightened uncertainty. In particular, both China and the US would pay a heavy toll in terms of growth (for exact figures, see the Focus «The threat of protectionism in the global economy» in this same Monthly Report).

    In Europe, political uncertainty rises once again. On the one hand, if the Italian government fails to present a credible fiscal plan in July, the European Commission is likely to recommend to the European Council to impose an excessive deficit procedure (EDP) on the country. This would oblige the Italian cabinet to include adequate adjustment measures in its budget for 2020, which is to be presented by mid-October 2019, in order to streamline the national accounts but without harming economic growth, which is already scarce. The negotiations between Rome and Brussels will be drawn out (the EDP is essentially a gradual, political process which offers a lot of leeway for affected countries to take corrective measures), but the tensions are likely to gain prominence over the coming months. Furthermore, the Italian government still has the option to call new elections at the end of the year, which could lengthen the whole process and intensify the conflict. In the United Kingdom, the situation is not looking much brighter: Boris Johnson

  • The financial markets complete a semester of contrasts

    Stock markets on the rise, interest rates at minimum levels and central banks set to close an eventful semester. In June, the financial markets closed an eventful semester, marked by successive alternations between periods of calm and episodes of risk aversion and volatility, with a constructive tone. In particular, following an end of 2018 with significant stock market losses and falling interest rates, in the first months of 2019 the markets exhibited a constructive tone. This was supported by the alleviation of trade tensions, the slowdown in the tightening of monetary policy by the major central banks and some encouraging economic data. Nevertheless, the serenity and the significant stock market gains took a sharp decline in May when the trade negotiations between the US and China broke down and fears of a marked slowdown in the global economy returned. This led to a rebound in risk aversion, with the resulting stock market losses and sinking interest rates. In this context, in June the major central banks opened the door to the possibility of relaxing monetary policy as a preventive measure to combat the intensification of the risks to economic activity. Although these messages were received with a recovery of sentiment in the markets, stock prices reflect expectations of a much more accommodative monetary policy than what the central banks are currently indicating, and such an imbalance could lead to renewed episodes of volatility over the coming quarters.

    The Fed opens the door to lowering interest rates. At its June meeting, the Fed gave a positive assessment of the US economy and reiterated the favourable outlook for the economic scenario in the medium term. As such, it maintained its reference interest rates within the 2.25%-2.50% range. Nevertheless, the members of the Fed placed greater emphasis on the persistence and intensification of risks (such as the resurgence of trade tensions and the uncertainty surrounding the slowdown in the global economy). With these concerns, and in view of the fact that inflationary pressures remain moderate, the Fed opened the door to the possibility of lowering its reference rates over the coming months, stating that it is prepared to offer new stimulus in the event that the risks continue to undermine economic confidence. In particular, at the meeting the Fed also presented the quarterly update of its macroeconomic forecasts. Although this did not include any major changes to the projections for economic activity and inflation, there was a significant reduction in the interest rate forecasts: almost half of the members of the Fed now foresee at least one rate cut this year (see second chart). Therefore, stock prices reflect a 100% probability that the Fed will reduce interest rates by 25 bps in July. Although this expectation is consistent with the clues given by the Fed itself, the stock prices go even further and suggest a high probability that interest rates will have been lowered by around 100 bps by late 2020 (a much more aggressive reduction than that reflected by the expectations of the members of the Fed).

    The ECB emphasises the uncertainties and stresses the accommodative message. Much like the Fed, at its June meeting the ECB maintained a relatively positive view of the medium-term outlook but stressed the need to preserve an accommodative financial environment to support domestic demand and inflation, in the face of the persistence and escalation of risks. Thus, the ECB reiterated that it will continue to be present in the markets for a long time to come through asset reinvestments, it postponed the indicative date for the

  • The Spanish economy shows strength in a demanding semester

    Economic activity continues to grow at a steady pace. In the more adverse external environment described in the section on the economic outlook for the international economy of this same Monthly Report, the indicators show that the Spanish economy is weathering the slowdown in the global economy better than its European partners. In particular, after growing by a solid 0.7% quarter-on-quarter (2.4% year-on-year) in Q1 2019, CaixaBank Research’s short-term GDP forecasting model suggests a quarter-on-quarter growth of 0.6% in Q2 (the first GDP estimate will be published on 31 July). This growth rate reflects the high level of job creation, the improvement in consumer confidence and the steady growth of turnover in both the services sector (+5.4% year-on-year in April, three-month moving average) and the industrial sector (+2.4% year-on-year). In addition, industrial production rebounded in April with growth of 1.7% (in March it had fallen by 3.0%, held back by the energy sector, which is especially volatile). On the other side of the scales, there has been a certain weakening of business confidence (in May, the manufacturing and services PMIs fell by 1.7 and 0.3 points down to 50.1 and 52.8 points, respectively), as well as of the foreign sector. Nevertheless, for the time being they are not holding back growth rates, which remain at considerable levels. As such, although growth continues to moderate towards levels that are more in line with the economic potential, and thus more sustainable, Spain remains one of the countries with the best growth rates in the euro area, driven particularly by the contribution from domestic demand and investment. This is also reflected in the latest macroeconomic forecasts by the ECB, which in the breakdown by country suggest that Spain’s GDP will grow by 2.4% in 2019 as a whole, a figure in line with the scenario foreseen by CaixaBank Research (forecast of 2.3%).

    The labour market shows dynamic growth. Employment growth stood at 2.8% year-on-year in May (seasonally adjusted data). This represents a good pace of job creation, albeit slightly lower than the 3.0% registered in April (on the other hand, this moderation is consistent with the trend towards more moderate growth in economic activity discussed earlier). Thus, the total number of people affiliated with Social Security stood at 19,442,113, very close to the all-time high reached in July 2007. By sector, the increased affiliation in services was of particular note, especially in tourism (+3.4%). On the other hand, the latest quarterly labour cost survey shows that, in the first quarter, the effective labour cost per hour rose by 2.4% year-on-year. This represents a 0.5-pp acceleration compared to the second half of 2018. This can partly be explained by the increase in company contributions at the beginning of the year (increase in the minimum wage and the removal of the contribution limit). Furthermore, this trend in labour costs is consistent with the wage increases agreed in collective agreements (2.2% on average from January to May).

    Spain comes out of the excessive deficit procedure, after reducing its deficit to below 3% in 2018 (specifically, to 2.5%), and enters the preventive phase of the Stability and Growth Pact. This entails a change in the European Commission’s approach to monitoring the public accounts, shifting towards medium-term goals such as the structural deficit, which allows the long-term fiscal position of the general government to be assessed (regardless of where the economy currently lies in the business cycle). Thus, the European Commission has requested from Spain a reduction in its structural deficit of 0.65% of GDP by 2020,

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