The slowdown taking place in some economies, protectionism, uncertainty over economic policy, an abrupt adjustment in China and rising debt are some of the issues that threaten to provoke another global economic crisis, one that would impact some regions more than others. “The general perception is that we are now past the peak in the cycle of growth of recent years,” says Rafael Doménech, the Head of Economic Analysis at BBVA Research.
2019 has started with a less favorable economic sensation than 2018. In different places around the world, risks are accumulating that pose a threat to global economic growth in 2019 - and to Spain’s economy in particular. As BBVA Research’s Rafael Doménech explains, external risks must be taken into account first.
In recent months, numerous signs are causing concern over the international environment. The peak in growth in the expansive cycle of recent years is now behind us and the global economy has started to slow. Meanwhile, global liquidity has begun to diminish and global debt is now higher than it was before the last crisis (317% of GDP in the second quarter of 2018).
In the eurozone, after growing 2.4% in 2017, the slowdown observed in 2018 will continue throughout this year, with growth barely reaching 1.5%. Every tenth of lower growth in the eurozone represents a tenth of lower growth in Spain on average, unless other factors compensate for this. With the end of the European Central Bank’s (ECB) QE, markets expect interest rates to start to gradually increase in the second half of 2019. Lower growth in international trade, protectionism, the possible rise of populist movements in European elections, the renewal of key position in European institutions, Brexit and uncertainty over Italy are some of the biggest threats to European growth in 2019.
At the same time, China’s economy is also experiencing a slowdown. It’s one of the economies most at risk from protectionism and a possible trade war with the U.S. Greater monetary and fiscal stimuli have been the responses to these threats, although they delay debt reductions that are needed as the country’s economy transforms. The experience has taught us how difficult it is to lower high levels of debt without the economy having a hard landing.
In the U.S., the fiscal stimulus will start to fade in 2019, while the Federal Reserve (Fed) will continue to reduce its balance sheet and raise interest rates. Stock markets and some credit markets have already sustained significant losses due to expectations of a looming change in cycle. How the Trump Administration manages this scenario will be a real test following the uncertainties it has generated in economic policy over the past two years.
Risks to Spain’s economy this year
Rafael Doménech underscores that the Spanish economy will have grown between four and five tenths less in 2018 than in 2017 (+3%), and forecasts indicate that the slowdown will continue this year, in a context of greater uncertainty due to an increasingly complicated external environment.
In terms of internal risks, tourism is no longer one of the drivers of recovery, either because it has reached its peak or because tourists are returning to countries like Turkey, Tunisia and Egypt. Furthermore, consumer spending continues its path of slow deceleration once demand was no longer blocked by the crisis. Some of the challenges Spain will have to resolve include a high unemployment rate (14.6%), salaries growing faster than productivity and low financing capacity compared to other countries. Spain’s economic cycle is returning to normal. Continuing to grow without generating imbalances will be one of the challenges to overcome in 2019.
But without a doubt, one of the biggest problems facing Spain’s economy is political uncertainty. The state budget has still not been passed, fiscal policy is expansive and the high levels of public debt and deficit are major vulnerabilities in the Spanish economy.
Banco de España, Madrid
All this uncertainty has a negative impact on the investment decisions of both households and businesses. BBVA Research has indicated that without the uncertainty, GDP could grow around three tenths more than the forecasted rate for 2019, which would create 50,000 more jobs. In addition, there is also the cost of measures that increase structural unemployment (like the unregulated increase in the minimum wage in 2019). Furthermore, if steps are not taken to ensure the sustainability of the pension system, the repeal of the pension revaluation system will have a negative impact on financing costs.
In this context, Spain needs policies that guarantee higher employment and productivity levels, more equitable growth to incentivize innovation, improve human capital and take advantage of the opportunities of the digital revolution.
A global economic challenge
In light of all of this, maintaining confidence in different locations amid a scenario full of uncertainty will be one of the greatest challenges for the global economy throughout the year.
Due to progress made to improve aspects like banking regulation and supervision in the eurozone, Europe would be better prepared to face an international crisis than it was in 2008. However, the Economic and Monetary Union has not yet completed the banking, fiscal, economic and political union, leaving the European Central Bank little room for maneuver. That’s why Rafael Doménech affirms that: “Successful national economic policies to manage a more intense slowdown than predicted will be key. Policies that are particularly relevant to countries like Spain, which have significant vulnerabilities due to unemployment and public debt levels.”
"Policies that are particularly relevant to countries like Spain, which have significant vulnerabilities"
Another point that should be addressed is that of emerging economies. Financial tensions could increase among some of these regions due to external vulnerabilities (high deficit, high debt in foreign currency and relatively low reserves to face imbalances) and the lack of appropriate economic policies given the weaknesses in the international environment.
Moreover, the interest rate hikes the Fed has planned for 2019 will put more pressure on the debt of companies and the public sector - and on the overvaluation of some financial markets. If the U.S. goes into a recession, the spillover to the rest of the economy will be relevant to global economic growth.
Despite being an unfavorable situation, BBVA Research presents a scenario of growth in 2019. Without a doubt, a scenario in which the global economy will decelerate, the biggest economic zones will grow less than in 2018 and the real challenge lies in preventing the multiple risks that define the world’s current economic outlook.