Ecoflash

EcoFlash

    EcoFlash of 11 February 2021
    Elections polls point towards a breakthrough by the Socialist Party and the far right to the detriment of the centre-right Ciudadanos party. Although political risks continue to persist in Catalonia today, the economic downturn caused by the Covid-19 crisis could weaken the momentum for the pro-independence movement and increase support for the Central Government. The Covid-19 crisis has accentuated Catalonia’s dependence on the Central Administration and Europe more broadly.
    EcoFlash of 21 January 2021
    Strong fiscal support is currently key to limit the impact of the coronavirus shock on growth and employment. But in the long term, the question of public finances control will be asked. In its November forecast, the European Commission predicts that Spain’s structural public deficit will widen to 7.2% of GDP in 2022. This would be the biggest deficit since 2010 – 2009 being a record high – and the largest within the Eurozone. Spain will not stabilise its primary structural deficit, which could surpass 5% of GDP by 2022. Nevertheless, the impact on public expenditures will be softened by low sovereign rates. Three major obstacles – some of which will be amplified by the Covid-19 crisis – will limit any decline in the public deficit ratio: 1) rising unemployment and poverty, 2) the impact of the ageing population on pension financing, and 3) the sluggish level of potential growth.
    EcoFlash of 06 January 2021
    The United Kingdom has since 1 January fully exited the European Union, and a free-trade agreement has been found, as has been customary with Brexit, at the last minute. While that is good news for the British and European economies, Brexit is still “hard” and will surely trigger substantial economic losses in the long term.
    EcoFlash of 08 December 2020
    The US mortgage market – the epicentre of the 2007-2008 financial crisis – has yet to be reformed. Nearly half of the USD 10,000 billion in housing loans are guaranteed by the Federal government via two private agencies (GSE), Fannie Mae and Freddie Mac, which were placed under FHFA conservatorship after they were bailed out in 2008. In recent weeks, there have been growing rumours that the FHFA is seeking to hasten the end of its conservatorship of the two agencies. Accelerating this process risks restricting household access to mortgage loans by prematurely ending the GSE Patch. Nonetheless, the colossal amount of capital that would be needed to carry out their exit from conservatorship, as well as uncertainty over the terms for maintaining the government guarantee, are likely to delay this process.
    EcoFlash of 24 November 2020
    With nearly 80 million popular votes and 306 members in Electoral College out of a total of 538, the Democrat Joe Biden won the US presidential election. His rival Donald Trump was beaten, but not by the landslide margins predicted by the polls. The Republican Party even gained seats in the House of Representatives and may hold on to its Senate majority. President-elect Joe Biden’s mandate promises to be especially tough, and his biggest challenge will be to overcome the political and social antagonisms. In the short term, the president-elect’s top priority will be to combat an ever worsening health crisis. Yet with healthcare, as with other issues like the environment, taxation and foreign policy, Donald Trump will go all out to leave his mark, while doing nothing to facilitate the transition.  
    EcoFlash of 05 November 2020
    The Q3 2020 rebound in the Eurozone GDP growth was stronger than expected: 12.7% q/q, compared to expectations of 10.5%. Of the region’s four biggest economies, France reported the strongest rebound followed by Spain, Italy and Germany. This rebound only partially erased the massive negative shock earlier this year. In Germany, France and Italy, GDP was still about 4% below the Q4 2019 level, while Spanish was still down by 9%. All components of demand contributed to French GDP growth. Sector differences reveal the heterogeneous impact of the shock. In all four countries, the rebound was largely mechanical, but other factors also came into play. Emergency measures to offset the impact of the lockdown last spring constituted a strong support. The shock was essentially absorbed by the public sector. Unfortunately, the rebound will be very short- lived. To curb a second wave of the Covid-19 pandemic, lockdown measures lasting at least a month were reintroduced at the end of October. Economic forecasters now expect Q4 GDP to contract, although the size of the downturn remains to be seen.
    In the draft 2021 budget, the French government predicts budget deficits of 10.2% of GDP in 2020 followed by 6.7% in 2021 (from a deficit of 3% in 2019). The government debt to GDP ratio is expected to rise by nearly 20 points, to 117.5%, in 2020, before dropping slightly, to 116.2%, in 2021. These unusual figures bear the traces of the massive recessionary shock in the first half of 2020 caused by the Covid-19 pandemic, and the similarly massive fiscal response as the government has sought both to lessen the impact of the crisis and to support the recovery. And the numbers are still climbing, as a result of the second wave of the epidemic this autumn.  When it comes to supporting the recovery, the France Relance plan makes EUR100 billion available over the next two years. The Finance Ministry estimates that this plan will add 1.1 points to growth in 2021 and a further 1 point in 2022. Some 75% of this support will come from the plan’s demand-side measures. With this support, the government expects growth to rebound to 8% in annual average terms in 2021, after having contracted by an expected 10% in 2020. The Haut Conseil des Finances Publiques considers the government’s estimate of growth for 2020 as ‘prudent’ and that for 2021 as ‘voluntarist’. As far as fiscal deficit forecasts are concerned, it believes these are ‘achievable’ both in 2020 and 2021 but that they are surrounded by huge uncertainty. The Economic, Social and Financial Report (ESFR) provides first indications for the public finances trajectory through to 2025, with the most notable item being a return of the deficit to just under the 3% threshold by this date. This budget marked another first with the presentation of a “green budget”, which accounts for public spending on the basis of its environmental impact.
    EcoFlash of 19 October 2020
    On 16 September, the Single Supervisory Mechanism (SSM) for the euro zone announced the temporary exclusion of reserves with the Eurosystem from the calculation of leverage ratios at major banks. Similar relaxations had been introduced a few months earlier in the USA, Switzerland and the UK. The exceptional measures taken by public authorities to bolster liquidity have resulted in a significant expansion of banks’ balance sheets. Fearing that leverage requirements could hamper the transmission of monetary policy and affect banks’ abilities to lend to the economy, first regulators and then supervisors have temporarily relaxed such requirements. With little prospect of central banks reducing their balance sheets (and therefore automatically central bank reserves) in the short term, the exclusion of reserves from leverage exposure might be required for a lengthy period. In the USA, where the relaxation of the requirement has gone further than in the euro zone (temporary exclusion of Treasury securities in addition to reserves, lasting deduction of reserves for custodial banks*), it allowed a marked improvement in leverage ratios at the very big banks in Q2 2020. Granted, the measure of leverage exposure used in calculating scores for systemic importance has not changed. However, targeted measures to rationalise balance sheets, by the end of 2020 or 2021, could help avoid an increase in G-SIB capital surcharges. * Banking organisations predominantly engaged in custody, safekeeping and asset servicing activities
    EcoFlash of 13 October 2020
    According to the polls, Democrat Joe Biden is well placed to beat Republican Donald Trump and win the presidential election on 3 November 2020. However, because of the unusual US election process, the result is far from a foregone conclusion. There is also the threat of the result being disputed, and it could be delayed. President Trump’s record, which for the sake of fairness should be assessed up to the start of the pandemic, is mixed. Although GDP, jobs and especially share prices rose rapidly, the deterioration in the public finances was unprecedented in peacetime, while inequality increased. Higher tariffs did little to reduce the trade deficit. Environmental protection went sharply into reverse under Trump. In this area – as in many others such as tax, redistribution and multilateralism – there are stark differences between the two candidates.
    Although the United Kingdom officially left the European Union on 31 January 2020, trade relations between the two trading blocs remain intact during a transition period. Barring a spectacular turn of events, this period will end on 31 December. Whatever happens, the UK is heading towards an exit from both the EU’s single market and customs union. This means that it will be a “hard” Brexit. And it could be the hardest possible if the two parties failed to agree on a free trade agreement. In fact, UK and EU negotiators have just completed their ninth round of talks – the last initially planned – but there are still major divergences. Should they fail to reach an agreement, the World Trade Organization’s basic rules would start to apply, which would be even more damaging for trade between the two blocs. Meanwhile, the UK has entered into negotiations with the rest of the world to replicate the EU’s trade agreements with third countries, from which the country will stop benefitting next year...  

On the Same Theme

Spain: the debate on pension reform arises again 2/19/2021
On the political front in Spain, the start of the year has been marked by a vigorous debate on pension reform, and more particularly on the question of a possible change in the calculation of pensions.
The epidemic is worsening but confidence shows resilience in January 1/29/2021
Spain’s health situation is still alarming. The pandemic continues to spread, forcing the public authorities to tighten restrictive measures, notably in the Madrid and Valencia regions. Yet the most recent confidence indicators have shown a certain resilience in January, notably the European Commission economic sentiment index.
Towards a protracted increase in the public deficit? 1/21/2021
Strong fiscal support is currently key to limit the impact of the coronavirus shock on growth and employment. But in the long term, the question of public finances control will be asked. In its November forecast, the European Commission predicts that Spain’s structural public deficit will widen to 7.2% of GDP in 2022. This would be the biggest deficit since 2010 – 2009 being a record high – and the largest within the Eurozone. Spain will not stabilise its primary structural deficit, which could surpass 5% of GDP by 2022. Nevertheless, the impact on public expenditures will be softened by low sovereign rates. Three major obstacles – some of which will be amplified by the Covid-19 crisis – will limit any decline in the public deficit ratio: 1) rising unemployment and poverty, 2) the impact of the ageing population on pension financing, and 3) the sluggish level of potential growth.
A fiscal stimulus monitored closely by Brussels 12/17/2020
Forecasts made at the start of the year will probably turn out to be accurate. Spain is set to be the Eurozone’s economy hardest hit by the Covid-19 epidemic. We forecast GDP to shrink by 11.8% in 2020 before rebounding by 7.0% in 2021. The social situation has worsened again this year, forcing the government to introduce new large-scale welfare benefits (e.g. minimum living income), which will be reinforced in 2021. Spain’s huge €140 billion stimulus plan will support the recovery, should raise the country’s potential growth and create jobs. But the structural budget deficit is widening. Once the Covid-19 crisis is over and the recovery underway, Brussels will intensify the pressure on the Government to speed up certain key reforms, and in particular regarding the country’s pension system.
All eyes on the employment figures 11/27/2020
The barometer provides a perfect illustration of the diverging trend observed between manufacturing and services activities. On average over the past three months, the manufacturing purchasing managers’ index (PMI) index has moved above its long-term average, while the indicator for services remains well below this trend...
Spain: 2021 budget unveiled amid health emergency 10/30/2020
The Spanish government presented on October 27 the 2021 budget. This budget, built to face the current crisis, will amount to a record EUR 239 bn, approximately 10% higher than the initial budget for 2020. It contains significant reinforcements on both the social and investment sides. However, the worsening health situation and the introduction of new restrictive measures may force the government to proceed to further budget adjustments in the weeks or months to come.
Slowdown in the economic recovery 10/16/2020
The economic recovery slowed down in September. That said, and as clearly shown on our barometer, the 3-month trend has continued to improve for most indicators – a logical process with the catching-up effect during the summer period...
Fiscal compromises are inevitable 10/1/2020
The Spanish economy registered a record contraction of 22.7% in the first half of 2020. With the public deficit likely to rise above 10% of GDP this year, the government faces some difficult decisions, notably on the terms and conditions of its temporary layoff scheme (ERTE). The recovery in industrial production since the easing in lockdown restrictions in May is encouraging. However, this only partially compensate for the slow pick-up in activity in other sectors. The final quarter of 2020 will be a pivotal moment. A substantial programme of support for employment and investment (under the recovery package announced this autumn) is needed, while narrowing down support more specifically towards the sectors lastingly affected by the crisis.
The epidemic’s rebound weighs on confidence 9/11/2020
This week’s Eurostat report confirmed that Spain has been Eurozone’s worst impacted country by the coronavirus. The resurgence of the epidemic and the implementation of new restrictions will hold back the economic recovery this semester, at least...
Rebound in consumer goods: a rare bright spot for the Spanish economy 9/10/2020
Despite the worrying economic situation in Spain, consumer goods activity is rebounding this summer. The manufacturing Purchasing Manager index (PMI) for the consumer goods sector rose in July to its highest level since November 1999.

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