The year begins amid general pessimism about the future of world growth. The continuous downward revisions of forecasts of the different international organisations raise doubts about whether we are facing simply an adjustment of world growth or we are headed for a recession. The truth is that the balance of risks has worsened and the increase in the volatility of financial markets is a clear reflection of the current uncertainty.
Global growth began to present signs of fatigue since the end of 2018. It is evident when observing international trade data. In December, world flows suffered the first contraction since the 2008 economic-financial crisis and it does not seem to be something specific, given the latest indicators.
The deterioration is preceded by an increase in protectionist tensions with the United States and China at the epicentre. All eyes are still on the negotiations in which both countries have been immersed for months, and its resolution remains the biggest question to answer. An agreement that satisfies both parties would be the best impulse to get back onto the path of sustainable growth in the global economy. For the moment, China has given ground and is committed to increase its purchases from the US economy along with lower tariffs, among others. Concessions that are insufficient for the United States, who are willing to extend the talks with Beijing "as long as is necessary" to achieve their objectives. The backdrop: a struggle for global geopolitical control in which the US economy is not willing to give way.
At this juncture, the growth of the Asian giant is losing momentum, possibly more than what its official statistics reveal, and the incentives from its leaders have not been slow to arrive.
A package of mostly fiscal measures was announced by Prime Minister Li Keqiang at the beginning of March at the National People's Congress where he also showed their concern for the current environment. A transient solution that does nothing to correct the basic problem. The exhaustion of a growth model and an increasingly ageing population that both condition future progress. The economy is heading towards the lowest growth rate in the last thirty years. The official objective places the advance in the band of 6% - 6.5% for 2019.
The United States seems relatively immune to this state of affairs, at least for the time being. Their statistics are not a cause of doubt, the labour market continues buoyant, family spending continues growing as well as business investment. The fiscal stimulus will evaporate, but it will still have a positive impact this year. In this sense, the economy is on the way towards its longest period of expansion in history.
The biggest affected area is the Eurozone. The ECB revised its growth forecasts down to 1.1% for 2019 at the beginning of March, six tenths less than its previous forecast just three months ago; and almost half of the advance observed in 2018. This patent weakness led to the modification of its forward guidance, so that the first rate hike is not expected until the beginning of 2020.
The monetary stimulus will continue to be a vital support for the region that sees its larger economies lose steam.
The notable slowdown observed in the second half of last year seems to have had a transitory nature that, nevertheless, has been longer than expected. The weakness of Germany in recent quarters no longer only responds to the automobile sector affected by regulatory changes in the manufacture of diesel vehicles. The negative data has spread to a large part of the industrial sector This is holding back the external demand for capital goods, particularly from China, the United Kingdom and Turkey. From now on, the prospects for the German industry go through the undoubted necessity of adaptation of the automotive sector to be more environmentally-conscious. An agile response will allow maintaining the sector's expansion capacity. The resolution of uncertainty about world trade will be another key factor.
In France, the protests of the "yellow jackets" have interrupted both industrial production and household consumption.
For its part, Italy has already entered recession after recording negative growth during the last two quarters. After years of furious growth, the first external shock reveals the vulnerabilities of its situation. The transalpine economy's structural problems are well known, on top of its tense relationship with markets and its political instability.
Spain continues to surprise us for its resistance. Its economy maintains its forward march above the Euro area average, but the contagion has already arrived here. Industrial sector registered strong falls in its activity in the months of November and December last year. The January respite does not seem to have continuity as indicated by the confidence indicators. Only the strength of domestic demand, and particularly consumption, is allowing a different behaviour to its neighbouring countries.
The biggest risk is that this period of uncertainty goes on over time and ends up holding back companies' investment decisions.
Political uncertainty is another hotspot to watch. We are once again facing an election year. The difficulty in forming stable parliamentary majorities conditions the path of reforms necessary to continue correcting our structural problems; and in the long run we will end up paying the price. We urgently need to reach a consensus on fiscal policy that seeks to correct the structural deficit. The positive inertia of the cycle will not always be with us.
Finally, we should not forget the other great source of uncertainty that is weighing on activity in Spain and the Eurozone in general. Negotiations between the European Union and the United Kingdom are not coming to fruition.
Now the biggest challenge is to avoid a train crash, that is, the possibility of a hard Brexit.
In short, the growth forecasts for most of the economies in 2019 lead us to believe that we are facing a year of moderation in the expansionary growth path of recent years, but in no case a contraction in economic activity. Signs that invite optimism, if it were not because economists have historically been unable to predict recessions. However, the fundamentals of activity seem solid and as the risks that threaten the growth dissipate -protectionism, strong slowdown in China, Brexit- we should see an improvement in activity and leave the spectres of recession behind.
