Is winter coming back?Josep Lladós
Gustavo Adolfo Bécquer said that while there is spring in the world, there will also be poetry. However, the main economic managers seem to be more interested in continuing to compose works of the dramatic genre, devising new conflicting episodes and illustrating to the public at large the limitations of their own economic policies to undo so much of a mess.
The soap opera addict community is anxiously awaiting the imminent outcome of the "Winter is Coming Back", in the middle of the spring season, while many economic spokespersons are calling for a resounding warning of the return to the frigid times of the recession. Is the economic winter indeed coming back?
In fact, the global economy is experiencing a period of uncertainty and instability that has already affected the market mood, spread pessimism in all countries and forced economic growth forecasts to be lowered. The sluggishness in Europe is more evident, given our high degree of external openness. The reduced vigour of exports is rapidly transformed into a weakening of economic activity.
Different external and internal factors affect the European game board.
In the most remote environment, the commercial dispute between the two world economic colossuses, with a clear backdrop of struggle for technological leadership. It takes the honours among risk factors, given that the uncertainties about its final resolution, the slowdown in global industrial production and a lower Chinese dependence on imports are reducing the dynamism of international trade. In addition, due to its productive specialization and geographical orientation of foreign activity, Germany and its satellite economies are already suffering the regressive effects of commercial stagnation.
The main threat of not de-escalating trade frictions lies in passing on an increase in costs to the production chain and eventually to an increase in prices to end consumers.
The degree of fragmentation in industrial production is quite high and the interests of any particular country get diluted along the length of extensive and complex international production and distribution networks. In a context of slowing aggregate demand, making imports of intermediate products more expensive is not a strategy that encourages business expectations and the entrepreneurial investment spirit. Risk aversion tends to increase with uncertainty. So today few people venture to predict which side of the balance will the Trump Administration direct its attention to.
But we do not need to look too far to find others guilty of economic weakness. The deterioration in the three main economies of the continent is palpable, unable to counteract the lower contribution of export markets. In the face of such a challenge, the European Central Bank once again adjusted its policy, leaving keeping to the path of monetary normalization waiting on better times.
It is precisely in the persistence of these favourable financing conditions, where we find the potion that alleviates the anguish of the community members.
An drive of internal demand by the less indebted economies is a pressing issue, since the least of the risks that the Eurozone faces at this moment is the inflationary one. The main battering rams have been wasting the sure shots provided by Draghi for too long.
The worsening of forecasts is not unrelated to the greatest source of instability in the region, such as the grotesque and tiresome Brexit process. At stake is how to limit the harmful consequences of a painful tearing up of the single market and prevent a potential trade diversion effect after divorce.
Inevitably, any alternative scenario to the lasting permanence of the United Kingdom in a customs union would cause greater instability and volatility in the financial markets.
The global economy is slowing down and at tick-over speed it continues to present asymmetries. On both sides of the ocean, many internal imbalances persist that international economic interdependence has moved round the globe. Although there are no signs of a severe recession around the corner, the current cycle seems to have matured too quickly and the slowdown in growth is evident.
However, many of the aforementioned elements of risk could be mitigated by greater multilateral cooperation. Time and margin for manoeuvre still exist to be able to calmly withstand stormy times. It would be good if the coordination between monetary and fiscal policies would finally come together at some meeting point.
But the change of cycle will be more abrupt if global uncertainty increases and some of the described risks materialize. In that case, the adverse impact on business investment and employment could be considerable. The temptations of economic nationalism flourish like brambles and thorns on the edge of the vineyards. Some believe that they protect better from the aggressions of the environment, but their fruits are often scarce and much less palatable.