Saturday, August 17, 2019
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Santiago Carbó Valverde

​Deceleration of the economy

Professor of Economics at CUNEF and Director of Financial Studies at Funcas

The last few months have been marked by a slowing of the European and Spanish global macro-economy. Many economists -including some of the most media-conscious ones- have come to talk about the possibility of a recession in 2020, or even this very year. Although there are downside risks to the economy, it seems hasty to talk about recession. Nevertheless, even in this we do not agree with the economists. So far, there are some facts that we can agree on with most analysts. The world economy has experienced trade tensions between large countries and blocs (the United States and China particularly, but also with the European Union) that have generated a context of uncertainty about international trade that had an impact on economic growth. However, until now it is a deceleration that has occurred in almost all cases. It is also true that the European economy is one of those that has lost most after a few years of recovery. As for the Spanish, its growth rate for 2019 and 2020 will be about one point lower than previous years, but it will be substantially higher than the European level (and many other countries) and will generate employment, although at a lower level as it has done in the last five years.


Desaceleracion economica


At present, the uncertainty about world trade continues, despite the approach of the US and Chinese governments in recent months. It is possible that "they will not come to blows", and we avoid the worst of the commercial sanctions but we should not forget that there are presidential elections in the United States in November 2020. In the current political framework, this election could bring back the controversy over the protectionist barriers between countries, as a way to capture the votes of the discontented, from those who view the results of a liberalised global economy with distrust. Therefore, the return to a more intense growth on a global scale would be put off until at least 2021, when the political panorama of the United States becomes clearer. This is what the Federal Reserve seems to have understood that has changed its discourse that had pointed to further interest rate hikes, to one in which there seems to be no increase at any time, even suggesting that there may be new monetary stimuli, if necessary.


The North American economy recovered before those of the rest of western countries and, therefore, the rise of rates has been a reasonable strategy until now to stop it "overheating".


This Federal Reserve change of message -although somehow tainted by the pressure of the Trump Administration- seems to suggest that what now there exists a growing risks of a slowdown, rather than the opposite. In any case, the American economy has a greater dynamism, and in my opinion, it will behave better than the European one, whatever the scenario that may materialize: a more optimistic one (with a return to intense growth soon) or a more pessimistic (with strong deceleration).


What is common to the entire global economy -and which is a major hindrance on growth- is a high level of public and private debt accumulated over time. In recent years, concerns about the sustainability of debt have increased, particularly in those countries with low competitiveness and lax public finances. While the global economy was advancing -and although the debt also grew- almost no-one questioned the sustainability of the debt. Now that a certain macroeconomic slowdown has materialized, nervousness about debt returns, which could have been higher if it had followed along the path of rising interest rates more intensely.


I have no doubt that the situation of some "stressed" sovereign debts is an argument that has been used to slow down the rate hike.


Particularly in the Eurozone, no-one wants to return to those episodes of sovereign risk stress during 2010-2012. In any case, doubts about the sustainability of the debt will remain there for a long time and that, in itself, is news that does not contribute to growth. On the other hand, we will also have to closely monitor the concentration of a large volume of loans to companies in these years in non-banking financing segments that are not subject to supervisory control (what we call shadow banking). If the defaults on those loans increase, the consequences are difficult to determine, since there is no transparency about the lenders, their positions and the connections between them. There is no reason for a default crisis like the subprime mortgages of the United States of 2007-2008 to repeat itself, but it is advisable not to lose sight of the risks of these new dis-intermediated models of credit to the private sector, particularly companies, even more in a context of a global economy slowdown.


As for Europe, the slowdown seems to be more intense. France and Germany present signs of lower business confidence and marked less dynamism. Italy remains a quite worrying question, after 20 years barely growing, an almost unsustainable level of public debt and a government in direct confrontation with Brussels.


The transalpine country is a dangerous "cocktail", which not only generates distrust among investors but potentially could "derail" the Euro project.


Likewise, the negative consequences of the numerous uncertainties shrouding Brexit have already making themselves felt on the British and European economy, with a UK government that seems incapable of managing the thorny future which is materialising. All this complexity of context reinforces the idea of the need for greater fiscal and political integration -not only monetary- in the Eurozone, to cope with the next crisis, but there seems to be little political appetite in certain countries (mainly the Northern ones), "creditors" to the rest) who still have considerable distrust - justified in some cases- towards the peripheral countries. On the other hand, the growing European delay in the technological transition towards more environmentally-friendly production models seems to be taking its toll on exporting countries such as Germany.


Finally, the Spanish economy. Our country still lives on the "income" of the 2012-2013 reforms, which addressed doubts about our financial system and brought some structural reforms - the labour market being the main one- that made the growth phase of the last five years possible. It coincided with a period of "strong tail winds" (ECB expansive policy and low oil prices, among other factors) that has lasted until today, and will continue at least until 2020. However, our economy needs more reforms, to strengthen innovation and digitization and open their eyes on public finances.


Spain, similarly to what happens in much of Europe, should bet much more on innovation and the digitalization of businesses and economic activity.


Also, there is a need to complete the technological transition towards productive models more respectful with the environment. If we bet on this trajectory, the economy will grow. It takes much more than what has been done so far. In particular, a "national digitalization strategy" is necessary. Only in this way will we guarantee an increase in the welfare of our country, even if we continue to have a great dependence on traditional sectors such as tourism and related services.


In any case, the main short- and medium-term challenge for our economy is to return to a path of more realistic public action, where there is no ducking or manipulating of issues such as the unsustainability of the pension system, the problems of a dual labour market -with different contracts and salaries that generate notable dysfunctions- and the need to increase productivity in our country. This last aspect of productivity requires greater innovation, greater business investment -something which is rarely mentioned- and once again, greater digitization.


With economic growth, as has been the case since 2014, it is much easier for a government to change their ways and face up some reforms that might generate some adjustment and discontent in the short term - in any case, bearable because the economy is on the rise, sow the seeds of much more significant long-term benefits, which will also be sustainable. This has not happened in recent governments or in the proposals of virtually all political parties. Even some who seemed more amenable to these reforms seem to have abandoned the emphasis on them.


The next crisis could be quite tough if at present we do not act to correct these imbalances. I'm not optimistic There is no political appetite for it.


In short, we enter a biennium (2019-2020) that will be key to the world, European and Spanish economies of the next decade. The deceleration may linger around a while. For this reason, the main governments have to act, each in their own area, to mitigate the consequences of this slowdown for everyone and prevent it from becoming a recession in some countries. Since the financial crisis of 2008, much progress has been made in recovering the economy on an aggregate scale. However, growing inequality was taken off the political agenda ten years ago in the interests of greater efficiency. Nevertheless, it is a subject that cannot wait any longer. It has to return to be a priority in the political agenda without further delay, now that we still have growth. A strong economy is good news, but a strong society is the best news.


Santiago Carbó Valverde. Professor of Economics and Finance at CUNEF, Bangor University (part time) and the University of Granada (on leave). Director of Financial Studies of the FUNCAS Foundation, where he is also Executive Director of the Observatory of Financial Digitalization. He is a Research Professor at the Valencian Institute of Economic Research (Ivie). Consultant of the Federal Reserve Bank of Chicago of the European Central Bank and member of the Group of Economic Advisors of the ESMA (European Securities and Market Authority). He is an Independent director of Cecabank and Chairman of its Audit Committee.

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