Although Spanish growth remains solid, it is by no means sheltered from the European slowdown. In 2020, growth is expected to continue slowing to about 1.7%, after reaching 2% in 2019. The slowdown is also beginning to have an impact on the labour market. From a political perspective, Pedro Sanchez was the winner of November’s legislative election, although he failed to strengthen the Socialist party’s position. He was invested as a prime minister in early January by Parliament and he will lead a minority coalition government alongside the extreme left Podemos. The coalition will depend on the implicit support of some regional and nationalist parties, notably the pro-independence Catalan ERC party.
Economic activity may have substantially weakened in Q4, due to the slowdown in world trade and the nitrogen and PFAS problems. Fiscal policy should become very accommodative, although it remains doubtful if the government will succeed in implementing all the spending plans. Growth is likely to slow this year, before picking up in 2021 on the back of a stronger global economy. However, climate challenges and labour shortages continue to weigh on activity in particular in construction. Moreover, pensioners may face severe cuts because of the deteriorated financial situation of the pension funds.
Belgian GDP growth is expected to drop to 0.8% in 2020, down from 1.3% in 2019. Domestic demand remains the key engine of growth, partially offset by a negative contribution from net trade. Private consumption growth is reduced as employment increases now at a slower pace, after 4 strong years. Investment growth is up, spurred on by public expenditures. The lack of a majority-backed government contributed to renewed fiscal slippage, which remains a key risk for the Belgian economy.
Supported by catching-up effects, the Greek economy managed to accelerate slightly despite a slowing European environment. Confidence indices have improved strongly and the Greek state has successfully returned to the capital markets. The new centre-right government is seeking to cut taxes on labour and capital without sacrificing fiscal discipline. The recovery will be a long process, but it is on track.
On 31 January 2020, the United Kingdom will officially leave the European Union and all of its constituent institutions. Brexit will therefore happen in law if not in fact, as, during a so-called ‘transition’ period set to end on 31 December 2020, the British economy will remain a full part of the single market and the European customs union. Goods, services and capital will continue to move freely into and out of the EU, which will continue to have legal and regulatory authority. True separation will only come at the end of this period, once the framework of the future relationship has been settled. As has been the case for some time now, this final step does not look easy to achieve.
GDP growth slowed sharply in 2019, and this trend is expected to be confirmed in 2020. Uncertainty surrounding the business climate and international trade are straining exports and investment. Consumption is barely rising and is unlikely to revitalize growth. Despite this environment, and with inflation near the central bank’s 2% target rate, the Riksbank opted to raise its key policy rate from -0.25% to 0%. Even so, monetary policy is still accommodating.
In a less buoyant international environment, Denmark’s small open economy managed to maintain a rather dynamic pace. Thanks to its sector specialisation (pharmaceuticals, digital, etc.), the economy has been fairly resilient despite the downturn in the global manufacturing cycle. A labour market verging on full employment and accelerating wage growth have bolstered consumption, which is still one of the main growth engines. With the Danish krone (DKK) pegged to the euro, the central bank’s monetary policy will follow in line with ECB trends, and is bound to remain very accommodating. Fiscal policy will be geared towards the ecological targets of reducing greenhouse gas emissions.
The slowdown of global growth has gathered pace, forcing the Federal Reserve to cut the federal funds rate on two occasions, whereas the ECB has announced a comprehensive easing package. Nevertheless, the slowdown is expected to continue. Uncertainty is pervasive. Companies question the true state of demand faced with slower growth, trade disputes, Brexit worries, geopolitical risk. Corporate investment suffers and may impact households via slower employment growth. The room to boost growth via monetary policy and, in many countries, fiscal policy has become limited, and this is another factor which could weigh on confidence. Surveys of US corporate executives point towards high concern about recession risk and the US yield curve inversion adds to the unease
The contraction in world trade, exacerbated by President Trump’s tariff offensive against China, has begun to spread to the United States. The economic slowdown, which can also be attributed to domestic factors, has prolonged throughout the summer of 2019, and business surveys do not suggest any improvements in the months ahead. Corporate investment will remain downbeat, while household consumption, which has been resilient so far, should begin to falter. In the face of this environment, the Federal Reserve -- which no longer provides forward guidance on upcoming policy moves – is bound to lower its key rates again.
Since Q2 2018, Beijing has let the yuan depreciate against the dollar each time the US has raised its tariffs on imported goods from China. Yet, exchange rate policy as an instrument to support economic activity should be used moderately in the short term. There is also little room to stimulate credit given the excessively high debt levels of the economy and the authorities’ priority on pursuing efforts to clean up the financial system, the public sector and the housing market. Torn between stimulating economic growth and deleveraging, the authorities’ dilemma could get worse if recent fiscal stimulus measures do not have the intended impact on domestic demand, or if the external environment were to deteriorate further.
Japanese GDP growth was stronger than expected in early 2019. Despite the current troubles in the export sector, for the moment domestic demand - both public and private - is picking up the slack. In the short term, two sources of concern loom over Japan’s macroeconomic scenario. First, Japan is highly exposed to the slowdown in both the Chinese economy and international trade. Second, the VAT increase in October will curb consumption during the year-end period and possibly in 2020 as well. Faced with these internal and external uncertainties, Japan will maintain accommodative monetary and fiscal policies, the effectiveness of which remains to be seen.
At its September monetary policy meeting, the European Central Bank delivered a strong message. Through the broad mobilisation of its unconventional monetary policy tools, it aims to fulfil its mandate and reach its inflation target. At the press conference following the meeting, Mario Draghi seized the occasion to reiterate his call on certain eurozone governments to increase their fiscal support. The ECB is entering a long period in which it will have to remain mute, passing on the baton to the member states with comfortable fiscal leeway. This new round of monetary support is welcome considering the economic troubles facing the eurozone, although there are some doubts about its effectiveness.
Weak data and business cycle indicators suggest that German economy would be in a mild technical recession. The weakness is mainly in the manufacturing sector and has hardly affected the rest of the economy. Despite calls from different quarters, the government is unlikely to launch a fiscal stimulus, beyond what is in the coalition agreement and the climate package. Simulations show that spill-over effects of a fiscal boost to other countries will be limited. Moreover, the implementation might be hampered because of long planning periods and bottlenecks in the labour market. Political tensions could increase after the SPD congress in December.
The French economy continues to show proof of resilience judging from the stability of its GDP growth?–?at an annualised rate of just over 1%?–?and the relatively strong showings of confidence surveys and of the labour market. Although prospects are still favourable, the horizon has darkened in recent months with Germany showing signs of recession, the escalation of trade tensions and lingering uncertainty over Brexit. We expect business investment and exports to decelerate sharply under the weight of a more uncertain, less buoyant external environment. Yet the slowdown is likely to be offset by the expected rebound in household consumption, supported by major fiscal measures to boost household purchasing power.
The new Government has approved the update of the economic and financial document, planning to raise the deficit to 2.2% of GDP in 2020. The 2020 Budget Law is estimated to amount to EUR 30 bn. Some measures contained in the budget, such as the cut of the fiscal wedge, are expected to sustain the economy with a positive effect on growth, despite an increasing uncertainty. In Q2, GDP increased by 0.1 y/y, as stocks negatively contributed to the overall growth, while exports continued to rise. Domestic demand suffered from the mixed evolution of labour market and the further delay of the full recovery of the housing market.
Spanish voters will be called back to the ballot box on 10 November, but there is no certainty that the election results will pull the country out of its current impasse. The political landscape is still too fragmented to produce a lasting coalition. The line to follow in the face of Catalan independentism only exacerbates the divisions and helps justify the lack of co-operation. Meanwhile, growth has slowed somewhat more sharply than originally expected, although it is still holding around 2%, a performance that would be welcomed by many of the other big European economies. The elaboration and adoption of the 2020 budget bill will have to wait until a new government is formed.
Belgian GDP growth is expected to come down from last year’s 1.4% to a mere 1% in 2019 and 0.7% in 2020. This reflects a further slowdown in international trade, which is only partially offset by resilient domestic demand. Despite a slowdown in job creation, a pickup in disposable income spurs on private consumption well into 2020. Public finance remains a key risk-factor with government debt in excess of 100% of GDP. Further fiscal slippage seems almost inevitable with government formation talks not yet near a conclusion.
After its electoral success in late September, the conservative party (ÖVP) is expected to form a new government. To obtain a majority, the party could turn again to the FPÖ (far right). In that case, policies should remain largely unchanged and focus on fiscal consolidation and the reduction of the tax burden. The next government will face a less favourable economic environment. GDP growth could decelerate to around 1.2% in 2020. Nevertheless, public finances have improved considerably, giving the government sufficient leeway to fight a recession, if necessary.
The economic slowdown has been very gradual so far, but it is expected to progressively spread during the second half of 2019 and in 2020. With unemployment at the lowest rate since 2002, households remain confident and have just renewed their confidence in Prime Minister Costa’s administration. After winning the legislative elections of 6 October with more than 36% of the vote, the Socialist party is preparing to form a new government with the support of the other left-wing parties.
Finnish growth had only just regained some momentum in 2015 before slowing again in 2018. GDP growth is expected to weaken further in the quarters ahead. The country’s openness to trade exposes it to the deterioration of the global economic environment. Slower export growth and uncertainty linked to protectionist policies will undermine investment. Households, in contrast, should benefit from stronger wage growth. The unemployment rate has fallen to the lowest level since year-end 2008, and should continue to decline despite the slower pace of job creations.
As we approach 31 October 2019, the latest deadline for the British exit from the European Union (Brexit), who can say where the UK is heading? Probably not the Prime Minister itself, Boris Johnson, who lost his majority in the House of Commons in an attempt to suspend discussions and fuelled scepticism among his European partners by presenting a take it or leave it ‘compromise’ on the Irish backstop that is hardly applicable nor acceptable. This would leave the Brexit end-point with no deal, although this has been prohibited by a law, or the more likely, but by no means guaranteed, outcome of a new extension accompanied by an early general election.
The Norwegian economy is expected to report robust GDP growth through the end of 2019, thanks to dynamic oil sector investments in Norway and abroad. Growth is expected to slow thereafter in a less favourable international environment. Moreover, investment in the Norwegian oil sector is expected to ease up in 2020. However household consumption should continue to grow at a relatively sustained pace, buoyed by wage acceleration. The central bank of Norway will not opt for any further rate increases in the quarters ahead. Inflation should hold near the central bank’s target of 2%, while external risks are on the rise.
A sigh of relief followed the publication of first quarter GDP data. However since, growth concerns have picked up again on the back of a collection of new economic data but also — and perhaps more importantly — due to continued high uncertainty. The latter stems from concerns over the extent of the slowdown and its consequences in terms of economic risks. It also emanates from escalating tensions between the US and China over trade. The effects of this confrontation already show up in the Chinese data while in the US, mounting anecdotal evidence also point to its detrimental impact on business and the agricultural sector. The Federal Reserve has turned a corner and indicated that rate cuts are coming, much to the joy of the equity market
Although household consumption remained rather buoyant at springtime, foreign trade as well as investment may have weakened. In June, the business survey results were lacklustre, while the Federal Reserve opened the door to cutting interest rates. Already back on the campaign trail, President Trump is unlikely to soften his hard line on tariffs, although he will surely remain as unpredictable as ever. The economy is likely going to need some support.
With the export sector hard hit by US tariff measures and private consumption growth weakening, investment growth has slowed. Although domestic demand could pick up in the short term, bolstered by monetary easing and fiscal stimulus measures, export prospects depend on the outcome of trade talks between Beijing and Washington, which remains highly uncertain. The authorities are bound to use foreign exchange policy sparingly to avoid creating a source of financial instability. Moreover, the current account surplus has improved again in recent months.
EcoPerspectives is the quarterly review of advanced economies (member countries of the Organisation for Economic Co-operation and Development) and China.
It provides an outline of several advanced economies using indicators for the past quarter and it looks ahead in order to better understand and anticipate the main economic problems of the countries in question.
For EcoPerspectives, economists from the advanced economies team regularly monitor the key economic indicators of selected countries. In particular, our experts use the quarterly forecasts provided by BNP Paribas (for growth, inflation, exchange rates, interest rates and oil prices). Each economist analyses the economic situation of one or more countries, based on the available indicators, in order to see how they change, including the industrial production index, quarterly gross domestic product (GDP) and inflation forecasts, the consumer price index (CPI) and the producer price index (PPI), and employment and unemployment figures. How various stakeholders’ views evolve is also studied and analysed closely (e.g. household confidence and business climate). The author comments on the main factors that influence and determine the economic activity of the country concerned and the economic outlook for the coming quarter.