The ESADE Economic and Financial Report, coordinated by the ESADE lecturer David Vegara with the support of Banco Sabadell, forecasts stable growth for advanced economies for the year — with an increase in GDP of 2% in the eurozone and 2.2% in the US – as well as for most emerging and developing economies, thanks to the upturn in investment in capital goods, industrial production and international trade. These variables, in turn, will help raise business and consumer confidence. Meanwhile, inflation will also continue to edge up, although more slowly than might be expected. Advanced economies are expected to see inflation very similar to that registered in 2017 (1.7%, more than double the rate in 2016). According to the report, rates in the eurozone will not converge around 2% until 2019 or 2020.
The ESADE Economic and Financial Report highlights the increase in recent years of cooperation between eurozone countries through commitments such as the ‘fiscal compact’, the Macroeconomic Imbalance Procedure (MIP), the banking union, or the creation of the European Stability Mechanism (ESM). However, the authors argue that to bulwark the zone against potential future crises, the banking union must be equipped with a true European deposit guarantee scheme and a mechanism to support the bank resolution architecture. Furthermore, the components of a certain common fiscal policy need to be established to deal with asymmetric shocks. This set of proposals is opposed by a large group of countries, led by Germany. However, this did not stop the European Commission from presenting, in late 2017, a proposal to take further steps towards economic and financial integration on these fronts. In the authors’ view, only the transformation of the ESM into a European Monetary Fund stands a chance of happening in the short term and, even so, such an initiative would face significant technical and political challenges.
With regard to Brexit, the report calls the conditions reached in the exit agreement in 2017 ‘good news’, as the United Kingdom committed to paying a divorce bill of between €40 and €60 billion. However, the agreement has done little to clear the way for the next steps. On the contrary, as the negotiations progress, the ESADE experts warn that the contradictions of the initiative, the challenges of maintaining the so-called soft border with Ireland, and the agreements with third countries are likely to be revealed.
The United States, which grew just over 2% last year, is projected to close 2018 with similar growth. All eyes will focus on two key events over the year: the renegotiation of the Free Trade Agreement with Canada and Mexico (NAFTA) – which could modernise such agreements in terms of e-commerce and intellectual property, but also harden their protectionist facet – and, especially, the effects of the tax reform passed in late 2017, including a tax cut that could amount to 0.8% of GDP. With regard to this latter initiative, the authors of the report believe the effects will be modest, as the reduction in the nominal corporate tax rate is much smaller once one takes into account the effective rate companies are already paying, whilst the potential impact on household spending will be minor, as most of the tax cuts are concentrated amongst high-income families.
The outlook for China, whose economy grew 6.5% in 2017, is also bright. The ESADE Economic and Financial Report highlights the positive impact of the shift in its economic model – from exports and investment to household consumption and the provision of public goods and services – and of the various measures taken to offset the negative consequences of the credit growth in recent months to stave off the economic downturn. Although these measures – lowering corporate debt, substituting bank credit with debt securities or encouraging mergers – have managed to stop the growth in private credit, they have not managed to reduce their volume. That fact, the report argues, poses a significant risk to the financial health of the country and the rest of the world.
With regard to emerging economies and Latin America, the ESADE experts highlight the lowering of interest rates, the appreciation of most of their currencies against the dollar, and the fact that capital flows are continuing apace thanks to investor optimism. Additionally, according to the reports’ authors, the positive performance of the global economy and the slow and predictable pattern of monetary restriction by the large central banks of developed countries offer considerable room to manoeuvre to emerging economies, which will normalise their monetary policies more slowly than the former group. The experts further stress the boost to exports from these regions, whether industrial products or commodities, although they acknowledge that neither the demand for industrial goods nor climbing commodity prices will be enough to allow emerging economies to grow beyond their potential.
Main economic risks in 2018
Although the ESADE Economic and Financial Report predicts that the global economy will continue to grow in 2018 at a rate similar to that of 2017, it warns of political, financial and monetary risks. The political risks include the aforementioned consequences of Brexit and the NAFTA renegotiation, as well as the conflicts in North Korea and the Middle East, the mid-term elections in the US, and the presidential elections in Italy and Mexico. Amongst the financial risks, the report highlights the high levels of public and private debt due to excessive leverage and high asset prices, which are already a cause for concern and more so in a context in which monetary policy will be normalised. Were this process to move faster than expected in the case of the US Federal Reserve (Fed), the ESADE experts warn of a possible ‘litmus test for the financial markets and mechanisms for the transmission of monetary policy’.
The normalisation of the Fed’s rates, which are expected to be raised three times over the course of 2018, to 2.5%, will contrast with the maintenance of the expansive policy of the ECB, which will continue to purchase assets over the first months of the year.