- Prospects for the eurozone economy have been marginally revised upward to 1.3 percent, while the outlook for global growth is maintained at around 3.3 percent.
The global economy has performed better than expected in the first part of the year. MAPFRE Economic Research has raised short-term growth forecasts slightly for developed countries, Spain included, in a context where economies have benefited from the central banks’ new shift toward a lax monetary policy. However, it remains prudent as far as the long-term is concerned because it believes the economy has now fully entered a cyclical change, thereby softening future growth expectations. Therefore, it expects global growth to be close to its potential at around 3.3 percent for 2019 and 2020. This is the main conclusion emerging from the quarterly update in the 2019 Economic and Industry Outlook report, published today by Fundación MAPFRE.
Spanish growth forecasts for 2019 have been revised upward from 2.3 percent to 2.4 percent and from 1.9 percent to 2.1 percent for 2020. It is expected that the Spanish economy will continue growing faster than the eurozone, although the report warns that fiscal expansion, such as recourse to savings and revenue, will reach its limits in 2020. Against this backdrop, Economic Research notes that the current primary deficit appears unsustainable when public spending, for example, was one of the drivers of growth in the first quarter of the year (2.4 percent). For this reason, it has detected early signs of slowing activity in the coming quarters, such as a cooling in exports.
Economic Research also believes that second quarter growth in the eurozone will weaken compared to the first quarter, when GDP grew 1.2 percent. However, the outlook for this year is up by a tenth to 1.3 percent, and up by the same amount to 1.5 percent for 2020. This is in anticipation of the positive effect of European Central Bank (ECB) stimulus measures, bolstered by the positive unemployment rate (7.6 percent in April) and real salary growth (around 2 percent).
Risks on the Horizon
Economic Research sees eurozone governance as one of the main global risks, with the situations in Italy, Greece and the UK highlighted as the most vulnerable. Elsewhere, the report highlights the risk resulting from economic policy in the United States, macroeconomic and financial adjustment in China, high levels of global leverage, and geopolitical risk, following the rising tone of the Trump administration, with its migration crackdown on Latin America and the trade pressure it is exerting on various eurozone countries—not to mention China and the new tariff war.
Shift in Monetary Policy
The second quarter was marked by the new stance taken by banks on both sides of the Atlantic. On June 6, the ECB announced that interest rates will remain unchanged until the first half of 2020, postponing normalization by a year. In fact, the market still sees additional room for lowering (deposit) rates and driving the generation of liquidity even further. On this, Economic Research warns that the ECB’s position could be too punitive on the bank’s interest spread, noting that the stability of the financial system’s balance sheet is being challenged by low long-term debt rates.
The Fed has also joined this shift in monetary policy, moving from forecasting an increase in the US refinancing rate to 3 percent in 2019 to considering a cut in the cash rate of 25 basis points this year, with at least one more cut in the first quarter of 2020.
This new monetary policy signal has significantly impacted emerging market currencies, affording them greater stability despite current account impairments. In addition to the easing pressure on currencies, there is now a greater margin for their central banks to adjust the management of official interest rates consistently.
You can read the full report here.