Key macroeconomic indicators
By Rafael Doménech.
- The worldwide slowdown will end in 2020 and monetary policy will remain stable.
- The growth rate of the Spanish economy has stabilized at 1.6% and it is better prepared for the lower growth around the world.
- This year's key risks are trade tensions between China and the United States, Brexit, the American elections and geopolitical tensions, and their consequences on oil. We must pay attention to how protectionism evolves, which is the main risk right now.
- In Spain, the risks are focused on global growth, especially European growth, and geopolitical tensions. The new government must take measures to improve investments in production and productivity and to reduce uncertainty. In 2020, Spain will see growth of 1.6%, inflation of 1.1% and unemployment will be reduced to around 13.5%.
In 2020, there will be 4 factors that determine the economic forecasts both globally and in our country:
- Worldwide, growth is stabilizing, while trade tensions and financial volatility are both waning following the agreement between the US and China, the good outlook for the USCMA and the lower risk of a hard Brexit (and of a recession in the United States and Europe).
- With growth of 1.8% expected in the United States and 0.9% in the EMU (in 2020), no changes in the monetary policy of the Fed and the ECB are anticipated this year, but interest rates in emerging countries are expected to fall. Furthermore, we have to be wary of rising geopolitical tensions in the Middle East, especially between the United States and Iran, which will influence the price of oil.
- Spain's GDP is expected to grow 1.6% in 2020, continuing the trend from much of 2019. This is despite the uncertainty and its negative impact on internal demand, which does seems limited. Meanwhile, exports are starting to turn around and are recovering somewhat, while trade policy continues to be pro-cyclical.
- In any case, the Spanish economy is better prepared for a lower growth scenario around the world. We don't anticipate any significant imbalances. The financial situation of the private sector is stronger and the ECB is guaranteeing low financing costs. However, these patterns must continue to be reinforced by making additional efforts to reduce unemployment (with new reforms) and avoid further uncertainty (which reduces investment).
The situation of the global economy
Based on our indicator, the deceleration has stopped and growth will stabilize at around 3%. World trade, for its part, has also stabilized in expectation of reduced trade tensions, which should once again drive the growth of exports. These, in recent quarters, have created a strong reduction in world exports that is closely correlated with the OECD's leading activity indicators. The latest data show a stabilization of these exports, which should exhibit more dynamism in 2020 as a result of the recent US-China agreements, and in the case of the Eurozone, due to the lower uncertainties involving Brexit and the recovery of Turkey.
In this context of growth, the Central Banks will keep the expansionary stance of their monetary policy unchanged in 2020. With regard to the FED, and following the 75-basis-point reduction in 2019, no changes in interest rates are expected in this new year. Changes in the ECB's interest rates on deposits are also not expected (currently at -0.5%), nor is an increase in asset purchases (what we call Quantitative Easing).
However, Cristine Lagarde announced that 2020 is the year that will see an exhaustive review of the monetary policy strategy, with a revised inflation target, an evaluation of the various tools for monetary policy and the possibility of creating a digital currency for the Eurozone.
In short, the economic forecasts call for global growth to stabilize at around 3%, detailed as follows:
In the United States
Growth converges to its potential in 2020, while the risk of a recession from recent quarters wanes.
The reasons are:
- Private consumption remains strong, supporting economic activity, while the weakness of private investment persists.
- GDP growth converges to its potential, with no significant inflationary pressures.
- Despite the reduced risk, the lower worldwide growth, the uncertainty that still exists about future negotiations with China and the aforementioned "weak investment" are causes for concern as 2020 kicks off.
- The same is true of political tension, which could increase before the 2020 elections.
The soft landing continues while the deceleration is lower than expected. The effects of trade tension in 2019 add to a structural slowdown carried over from previous years, but with higher growth than expected. This has been slightly revised upwards for 2020 due to a decrease in trade tension and the increased willingness to use fiscal and monetary stimuli.
What are the risks? Strategic rivalry with the US, despite the recent trade agreement.
- Monetary and fiscal stimulus measures could lead to higher levels of debt in the Chinese economy.
Its growth stabilizes and expectations improve slightly, with GDP growth revised upwards (by a tenth) with better-than-expected data, which reinforces the prospects for stabilization, while inflation remains below the ECB target. As for monetary policy, interest rates are expected to remain at current levels at least until 2022. Finally, fiscal policy will continue to be expansive in 2020, with an orderly Brexit in January and knowing that the agreement between the United Kingdom at the end of 2020 remains a significant risk.
Key factors for the global economic outlook
- Trade negotiations between the US and China.
- US Presidential Elections
- Brexit negotiation.
- Changes in the monetary policies of the FED and ECB.
- Debate on fiscal stimulus in Europe.
- Geopolitical tensions and the tension over the price of oil.
Risks that could affect this growth
Although global risks have decreased in the short term due to the trade agreement between the US and China, they have increased in the Middle East as a result of the conflict between the United States and Iran. This will require us to be attentive to the trend in the price of oil, while financial vulnerabilities can amplify the effects of these risks.
The primary risk continues to be protectionism. The possible disoderly deleveraging that may be triggered by expansionary fiscal and monetary policies is also dangerous. Plus, geopolitical tensions in Hong Kong continue.
For the Eurozone
We have to see how exports recover and how political uncertainties play out.
Growth in Spain
Taking this international context into account, economic forecasts indicate that the Spanish economy could grow as much as 1.6% in 2020. The slowdown in growth we have seen in recent quarters is touching bottom, unless some of the existing risks materialize. In fact, we've seen that GDP is stabilizing, as evidenced by the last 3 quarters of 2019, where we ended up with 0.4% growth. The same as expected in the first quarter of 2020.
The sluggish labor market should also be hitting bottom. Once variations due to seasonal causes are factored in, Social Security enrollment could have increased by 0.4% in the 4th quarter of 2019.
However, this growth mentioned earlier will depend on how the different sources of uncertainty evolve:
- The recovery of international trade and growth in the Eurozone, with the negative knock-on effect that could have on Spanish exports.
- The new government's economic policies. Its measures must favor investment, reduce uncertainties and keep risk premiums in check. This requires agreeing on the measures taken (e.g., decisions on SMI or labor reform).
- Resume fiscal tightening with measures that don't damage investment, innovation or employment.
- The reduced political tension in Catalonia and its effects on economic activity.
Reforms to increase growth in the medium term
- Encouraging productive investment: Over the last few years, we have seen how investing in machinery and equipment in Spain has shown greater dynamism compared to the situation in the main European economies. Since 2017, this type of investment has increased by 16.1%, compared to 9.6% in the EMU, in an environment of considerable uncertainty. Looking ahead, the environment of low interest rates, high liquidity and competition in the banking market is expected to continue to drive this financing and investment.
- Encourage the growth of the active population and unemployment: Recent quarters have seen the growth of the active population, driven by the rise in immigration from Central America, Europe and Asia. This increases long-term growth capacity and also explains the recent moderation in the decline in unemployment. And so for it to continue to fall, appropriate policies are needed to improve the efficiency and equality of the labor market.
- Increase the potential growth of GDP through more employment growth and greater productivity in the Spanish economy: Estimates point to potential growth of between 1.5 and 2%, with no inflationary pressure, although some wage growth is anticipated.