The Spanish economy will grow by slightly more than 2.5% thanks to a tourism industry operating at maximum capacity and greater dynamism in consumption, but this increase in GDP will not be enough to consolidate the post-crisis recovery. The ESADE Economic and Financial Report for the second half of 2017 – coordinated by David Vegara, Lecturer in the Department of Economics, Finance and Accounting at ESADE, in collaboration with Banc Sabadell – warns that Spain remains on the list of European Union countries that still have to reduce their public deficit and debt through gradual fiscal adjustments without harming the most vulnerable population segments.
ESADE’s snapshot of the global economy for the first six months of 2017 is, generally speaking, positive. The report’s overview of the current economic situation, written by Josep Comajuncosa, Associate Professor in the Department of Economics, Finance and Accounting at ESADE, points to stronger demand, especially in investment, resulting from industrial production, an increase in international trade (after a few years of growth at a rate lower than Spain’s GDP growth) and a shift away from the shadow of deflation. However, progress is threatened by the Trump’s failure to define a coherent economic policy, the impact of Brexit (the negative consequences of which will grow as negotiations progress), and the vulnerability of some emerging economies that are heavily dependent on the expansion of credit and interest rate hikes. “For the moment, it looks like 2017 will be a better year than expected, but on a less solid basis than would be desirable,” the report concludes.
As for the emerging countries, where some of the global economy’s biggest unforeseen developments have taken place in the last three years – such as the slowdowns in China and India and the recessions in Brazil and Argentina – the report’s authors are optimistic, except in the case of China. In the first months of 2017, the Chinese economy has grown more quickly than expected. Its ability to keep growing depends on the expansion of credit, the vulnerabilities of the financial industry, the weight of corporate debt and the prioritisation of short-term growth by the political authorities, who plan to keep growth under 6% over the next few years. As for other emerging economies such as India and Southeast Asia, where exchange rate flexibility and economic policies have reduced capital outflows, the ESADE report predicts an expansion of credit and a change of trend in corporate debt.
Growth in the eurozone is also becoming consolidated, thanks to rising domestic demand derived from falling unemployment. The current predictions for GDP growth in the eurozone are just under 2%. Even so, the ESADE faculty who wrote the report recommend that the European Central Bank maintain its unconventional monetary policy, which encourages business investment and strengthens the financial industry by accelerating the repair of banks’ balance sheets and resolving bad debt. The report’s authors insist that fiscal policy should continue to play a major role because the gaps that opened up during the crisis have not been closed. In fact, the authors advise that countries with room to manoeuvre on fiscal policy – such as Germany and the Netherlands – should introduce expansionary policies to boost economic productivity and protect the most vulnerable population segments.
Finally, the recovery is also expected to pick up steam in Latin America. In Mexico, however, despite good growth figures, this trend has been slowed by the effects that harsher financial conditions have had on consumption and investment as a result of uncertainty regarding future trade relations with the United States. Brazil, meanwhile, is emerging from its deep crisis of the past two years in a more stable political climate and will introduce a more expansive monetary policy once the spike in inflation is under control. Argentina is also emerging from the recession of 2016 thanks to private consumption and public investment.
Brexit and Trump: waiting for the full impact
According to the authors of the ESADE Economic Report, the economic consequences of Brexit were less severe than expected in the first few months after the referendum, thanks to the depreciation of the pound sterling by about 10% and the policies adopted by the Bank of England to boost exports and offset the initial decline in business investment. However, the statements of the various agents involved in the negotiation following the invocation last March of the United Kingdom’s voluntary and unilateral withdrawal from the European Union have led forecasters to predict slower growth for the British economy – down from the current figure of 2% – as well as an increase in structural unemployment and greater public debt. These three indicators will influence the cost of the payments to the EU budget that the UK Government has pledged to pay, which could amount to anywhere from £60 billion to £100 billion.
The impact of the Trump Administration, which arrived in the White House in January, is still difficult to gauge. The key question is whether fiscal expansion will be compatible with a gradual increase in interest rates or, on the contrary, a faster increase in interest rates will be necessary. The latter would cause a sharp appreciation in the value of the dollar and could lead to financial conditions that are more demanding than expected in the United States and worldwide. If this situation were to come to pass, the US current account deficit would balloon, global imbalances would increase and the pressure to implement protectionist measures would grow, possibly triggering a number of reactions. “The consequences of such a turn could jeopardise the cooperative and multilateral global economic order as we know it,” the report concludes.
Recommendations to combat inequality in developed countries
In conclusion, the authors of the ESADE Economic and Financial Report note that, in order to preserve the benefits of international trade and an interconnected global economy, it is necessary to implement policies that combat inequality and vulnerability while helping to better distribute the benefits of globalisation among all population segments. The report’s authors note that taxes need to be put to better use in certain countries. Specifically, they argue that wealth should be transferred to families in order to achieve a better distribution of income through the reduction or elimination of regressive tax exemptions, and wealth and property taxes need to be put to better use.
Other steps recommended by the report include measures to help people acquire and maintain the necessary skills to participate in the economic process and adapt to its fast-changing nature. Such measures would include increasing public spending on primary and continuing education in order to improve young people’s employment prospects and facilitate access to public healthcare systems. According to the report’s authors, it is also necessary to strengthen social security and unemployment coverage in order to prevent people from dropping out of the workforce permanently in response to negative economic trends, thus preventing the loss of training that this entails. “In general, it is possible to design fiscal policies that improve income distribution and therefore reduce inequality without generating any loss of efficiency, in the sense of discouraging work and investment,” the report concludes.
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