MacroEconomic Bulletin - April 2022

1. GLOBAL OUTLOOK

COVID-19 threats in China.

After the surge of COVID-19 cases in several parts of Asia and the Pacific in mid-February, China seems to be facing the worst national outbreak since the first wave of the pandemic. While the Chinese government has stuck to a strict zero-COVID policy since the virus emerged in Wuhan in late 2019, the arrival of the Omicron variant and its new subvariant, which do not seem to be controlled by China’s vaccine, could jeopardize the effectiveness of these measures. In this sense, lockdown restrictions in cities across the country have been introduced, resulting in the shutdown of production lines in the technology hub of Shenzhen and closing of offices in Shanghai. The potential negative consequences of the restrictions on the economy together with the high uncertainty of the evolution of the health situation and its effect on the functioning of the supply chain have been to blame for the ‘black Monday’ experienced by China´s main markets on April 25, with fell between 4% and 6%, the worst drop since February 2020.

IMF Projections.

On April 19, the IMF published the revised forecast for 2022 that, compared to January’s (4.4%), presented a downward revision on global growth projection to 3.6% in both 2022 and 2023 because of the direct impact of the war in Ukraine and the sanctions on Russia. In the European Union, 2022 growth outlook has been revised downward by 1.1%, partly due to its direct trade and remittance links with Russia -a major supplier of oil, gas, and metals, which, together with Ukraine, in regard to wheat and corn, will have a major effect on growth-. On the other hand, commodity exporters, who benefit from the surge in energy and food prices, are the only group that has not suffered downward revisions of their medium-term outlook. The surge in food and fuel prices will have a greater impact on lower-income households globally, including in the Americas and Asia.

Central Banks.

On the one hand, after announcing in March that they will accelerate the end of the Asset Purchase Program (APP) in the third quarter from its original forecast of the year-end. At the last monthly meeting on monetary policy decisions on April 14, the ECB reinforced its expectation after noting the impact on inflation of the Russian invasion of Ukraine and warns that the Governing Council will take whatever action is needed to fulfil the ECB’s mandate to pursue price stability and to contribute to safeguarding financial stability. On the other hand, the ECB's deposit interest rate will remain unchanged. If any adjustment is required, it will take place after the end of the net purchases under the APP (Asset Purchas Program) and will be gradual. Either way, ECB’s interest rates are expected to remain at their current levels until inflation stabilizes at 2% in the medium term. In any case, it is observed that the increase in core inflation does not represent a medium-term risk to price stability. Finally, as it relates to the refinancing operations, the Governing Council expects the special conditions applicable under TLTRO III to end in June this year. On the other hand, the FED no longer debates whether to raise rates, but how fast to raise them. After March 16 Federal Open Market Committee (FOMC) where rates were increased from 0.25% to 0.5% for the first time since 2018, the FED has announced their intention to make additional rate hikes in 2022. In addition, they are focused on reducing the bank’s balance sheet at maximum rate of 95$ billion per month, to be implemented gradually over a period of three months or sightly a longer term.

Euro falls to two-year low against dollar.

Despite Macron's victory over Marine Le Pen on April 24 - which was expected to have strengthened the euro-, on April 25, the euro started the day with a sharp 0.5% fall against the dollar (1.071 dollars), reaching a 2020 low. The uncertainty related to the rise of the anti-European party, coupled with lower-than-expected growth rates for 2022 in the European Union and more cautious monetary policy in the eurozone relative to the United States had weighed on the euro, which is suffering its third consecutive fall and was trading at 1.11 dollars at the beginning of April.

2. SPANISH OUTLOOK

As mentioned in previous weekly outlooks, high inflation is one of the major risks the Spanish economy is currently facing. Latest data published point to one of the highest increases in years, reaching a 9.8% overall inflation rate and a 3.4% core inflation rate. In this regard, and to minimize the impact of the increasing energy costs, the Spanish government, as other European partners have already done in recent weeks, approved in the Council of Ministers on March 29, the so-called Plan Nacional de Respuesta al impacto económico y social de la guerra: a menu of policies aimed at effectively decoupling the evolution of gas prices from international energy markets to reduce the energy costs to the end consumer. Also, this week, the agreement between the European Commission and the governments of Spain and Portugal on the gas price cap was announced, which has established the reference price of gas at around 40 euro per megawatt-hour, valid for 12 months. Spain's IMF forecasts for 2022, after placing it almost two points above the eurozone average in January (5.8% in 2022 and 3.8% in 2023), has been revised by the IMF points to a drop to 4.8% in 2022 and 3.3% in 2023. In line with this review, the Bank of Spain has downgraded its growth forecast by -0.9 points (to 4.5%) for 2022 and by -1 point (to 2.9%) for 2023; meanwhile, the Airef has downgraded -1.6 points (to 4.3%) compared to January and -2 points compared to October forecasts; finally, at EthiFinance Ratings, in March we revise downwards our forecasts to 4.8% (compared to 5.5% previously) for 2022. For 2023 our forecast is 3.6%. In this sense, there has been a deterioration in expectations with respect to the second quarter of 2022, as measured by the Harmonized Business Confidence Index; thus, only 14.5% of the business establishments foresee a favorable quarter, while more than twice this number are pessimistic. Today we have known that Spanish GDP decelerated in 2022Q1 to 0.3% qoq, below consensus and our forecasts: 0.6%. In addition, the Government has review downwards it macroeconomic projection for 2022-2025, forecasting for this year a GDP increase of 4.3%, below its later forecast of 7%, and also below the analyst consensus of 4.8%.

3. FRENCH OUTLOOK

During March, inflation continued its upward trend, reaching 4.5%. The increase in prices was led by energy, food, and services. However, France presents a more moderate inflation than other European economies due to a slightly lower energy dependence and the early measures taken by the French Government at the end of 2021 to ease the energy prices surge. Like the revisions experienced by other economies, the IMF downgraded French economic growth, which it estimates at 2.9% in 2022 (3.5% previously) and 1.4% in 2023 (1.8% previously). Today we have known that French GDP stagnates in 2022Q1. On the other hand, the final data on French public finances were released, reflecting an improvement in both the deficit and debt, although both indicators remain at high levels. Nonetheless, this improvement was mainly due to higher-than-expected economic growth, rather than fiscal adjustments, as COVID-19-related aid was maintained during 2021, in addition to the launch of new schemes. Finally, the second round of the French presidential elections took place last April 24. After the first round, Emmanuel Macron came first (27.8% of the votes), followed by Marine Le Pen (23.1%), with whom he contested the second round, where Macron won with 58% of the votes. This result is rating positive, as it results in greater political stability at both the domestic and European level. Nevertheless, we will have to wait to assess the results of the legislative elections in France, where 577 deputies of the National Assembly will be elected 1st round to be held on June 12th and the second round on June 19th, which may lead to a more fragmented parliament given the results we observed in the first round of the presidential elections.

4. PORTUGUESE OUTLOOK

As expected, inflation continued to rise in March up to 5.3%. Although the increase in prices was led by energy, core inflation-maintained a rising trend, pointing to a pass-through effect of the last months inflation to fewer volatile goods. This surge in energy prices in recent months has already begun to affect the Portuguese industrial sector, which contracted again during February. Following a similar trend, the industrial production index continued to rise (26.3% y/y), which could translate into higher inflationary pressures in the coming months. Nevertheless, as in the case of Spain, the government already has the approval to establish the price of gas at around 40 euros per megawatt-hour, although its effect could be limited on the country's electricity bill, due to the higher proportion of consumers in the free market. In addition, the IMF revised downward its growth forecasts for the coming years to 4.0% in 2022 (5.1% in the October 2021 World Economy Outlook) and 2.1% in 2023 (previously 2.5%). On the other hand, during 2021, Portugal recorded a substantial improvement in the state of its public finances, both in terms of public debt and deficit. The deficit was reduced to -2.8% of GDP (-5.8% in 2020) Although the improvement was due to higher tax revenues and improvements in the economy situation and increase in spending. The tax burden increased during the past year, due to the rise in both indirect taxes -boosted by the recovery- and direct taxes -due to the increase in employment and minimum wage. In addition, public debt decreased in 2021, both in terms of ratio and volume, but remained at high levels (125.4%).