MacroEconomic Bulletin - First Half of June 2022



International markets first relief. Russia and Ukraine reach an initial agreement to unblock the Black Sea and reopen exports. The two countries account for 30% of world wheat and barley exports, 20% of corn, and 75% of sunflower oil, which led to an increase in their prices after the outbreak of the war. In this sense, the agreement would be a positive factor, alleviating the global food crisis, as well as the increase in the price of some foodstuffs. On the other hand, after two months of confinement, weighing down the country's growth and increasing pressure on global supply chains, China has ceased the strict confinement of Shanghai, its financial capital, which would loosen pressures on supply chains. However, the zero COVID-19 policy is far from over in China, as a day after opening the city, some neighborhoods, as well as a district in Beijing, were again confined. Therefore, the zero COVID-19 policy remains a risk to supply chains still.

First signs that some inflationary pressures may be coming to an end. What in January began as the maintenance of an already established roadmap of increasing the quota system of the OPEC+ by 400,000 barrels per day (b/d) every month, insufficient in the face of the registration of the first peaks in energy prices since 2014, would end up precipitating with the outbreak of the conflict between Russia (third largest oil producer in the world, with close to 10 million b/d) and Ukraine. OPEC+ would then agree to change its strategy and increase production to 432,000 b/d as of May to calm tensions in the oil market. However, and just a few days after the European Union approved a partial embargo on oil imports from Russia, OPEC+ announced a new increase in oil production of 50% (by 648,000 b/d), both in July and August. With this change in policy, demanded since the beginning of the year by the main economic powers, an easing of inflationary pressures is expected as oil supply increases, causing its price (which, referenced in Europe, reached $130/barrel between March and April) to fall.

Russia-Ukraine conflict: a new package of sanctions. The Council decided on June 3 to impose a sixth package of economic and individual sanctions against Russia. The agreed package includes a series of measures intended to reinforce pressure on the Russian government and economy, by including: a ban on imports from Russia of crude oil and refined petroleum products; a SWIFT ban for an additional three Russian bank and one Belarusian bank; and the suspension of broadcasting in the EU for three more Russian state-owned outlets. Through these measures, the EU seeks to continue its gradual approach to reducing Europe's dependence on the Russian economy: after the oil and the coal blockade -from the fifth package-, however in Brussels they assume that the gas blockade will come sooner or later. This brings the total number of EU sanctions packages against Russia to six in 100 days, marking a historic political and strategic shift within the EU.

The ECB is about to hike interest rates. The ECB Governing Council announced on the June 9 meeting in view of the new inflation forecasts (annual inflation at 6.8% in 2022, before it is projected to decline to 3.5% in 2023 and 2.1% in 2024) and the bank's 2% inflation target over the medium term, to raise the key ECB interest rates by 25 basis points at its July monetary policy meeting, just at the end of the net purchases under the APP as we included in our last reports. Although in recent months the ECB warned that any rate adjustment would be gradual, at this last meeting they have announced a possible larger increment at the September meeting if necessary, depending on the evolution of the medium-term inflation outlook. Beyond that, the Governing Council anticipates that a gradual but sustained path of further increases in interest rates will be appropriate, again subject to the new data and its assessment of medium-term inflation developments.

Croatia will be the twentieth euro country. After being included on 10 July 2020, the Bulgarian lev and Croatian kuna in the Exchange Rate Mechanism (ERMII, foreign exchange cooperation framework between the euro zone and the European Union countries that have not joined the eurozone), the European Commission has greenlighted Croatia to become the twentieth member of the euro zone as of January 1, 2023, from among the seven current candidates for membership: Bulgaria, Romania, Czech Republic, Sweden, Poland and Hungary. Croatia's convergence report adopted by Brussels shows that the country meets the economic (prices, public finances, exchange rate and long-term interest rates stability) and legal requirements for the adoption for integration into the monetary regime of the euro area. Croatia's is the first enlargement of the eurozone since Lithuania's joining in 2015, and takes place in a historic moment, after COVID-19 health crisis and amid the crisis over the conflict between Russia and Ukraine, in which there is more union and political will than ever before, and which will therefore be beneficial for both parties. For Croatia, who joined the EU a decade ago, this will make its economy stronger, bringing benefits to its citizens, businesses, and society at large. And for the euro zone, Croatia's adoption of the euro will also make the euro stronger, reinforcing it as a symbol of European strength and unity in and outside Europe.


After last April's relief, where inflation showed a slightly decreasing annual rate, the CPI picked up again in May 2022. As inflation rose to 8.7% yoy (8.3% yoy in April), and core inflation increased to 4.9% yoy (4.4% yoy in April). Regarding the main drivers, fuels and food were the ones with the highest increases. Nonetheless, we highlight the decrease in energy prices, which could indicate that the statistical effect we expected to see in the second part of the year, could be overshadowed by the increase in food and fuels. As for the labor market, it sustained its positive trend in May, with an increase in the number of employed persons to 20,232,723, the highest level, and a monthly decrease in registered unemployment of 1.4% mom. By sector, the increase was generalized, with the performance of the hospitality industry standing out. Also noteworthy was the change in the composition of contracts, with an increase in permanent contracts (+358,117 persons) and a reduction in temporary contracts (-177,744 persons). On the other hand, and because of the Spanish Government's turnaround in its foreign policy on Western Sahara, Algeria has announced that it will freeze its trade relations with Spain. This would not have a significant direct effect on the Spanish foreign sector since exports and imports with Algeria account for around 0.8% of the total. Notwithstanding, Spain would import 30% of its gas from Algeria, being the Spanish’s main supplier of this raw material, which would put greater pressure on the price of energy. Although contracts currently in force between Sonatrach and Naturgy guarantee the supply of gas until 2032, and if these were to be breached, the conflict would have to be resolved through international arbitration. This climate of uncertainty and high prices continues to drive downward revisions of Spanish growth. In this way, the OECD has also revised Spanish GDP growth to 4.1% yoy in 2022 and 3.1% in 2023, mainly because of the war between Russia and Ukraine.


Following the publication of the quarterly national accounts, the final GDP growth figures for the first quarter were released, confirming a -0.2% decline in the French economy over this period, with domestic final demand, which usually acts as the engine of growth in an expanding economy, contributing negatively to GDP growth (-0.6%) for the first time in more than a year, while net foreign trade contribution was positive (+0.2%). Specifically, the sharp fall of household consumption (-1.5% after +0.3% in Q4 2021), explains this GDP performance in a period in which gross fixed capital formation (GFCF) increased notably (+0.6% after -0.3%). According to the European Commission Spring forecasts for France, French GDP is expected to accelerate in the Q2 2022 (+0.4%), because all demand components are projected to contribute positively to growth, with a private consumption recovery explained by the full easing of sanitary restrictions, but also will remain subdued until the end of the year, in a context of heightened uncertainty because of high inflation, important supply disruptions and the Russia’s invasion of Ukraine. In this sense, and after inflation continued to rise in April (4.8% yoy), May provisional data points to a 5.2% yoy CPI increase as a result from the acceleration of energy, service, food and manufactured goods prices during this month. However, according to the European Commission forecasts, inflation is expected to decrease during the third quarter 2022, which could reflect a statistical effect. On the other hand, France legislative election took place on June 12 and June 19, first and second round respectively, after April presidential elections in which Emmanuel Macron was re-elected for a second term. In the first round LREM won with 25.7% of the votes, followed by LFI with 25.6% of the votes.


On June 3, EthiFinance Ratings affirmed Portugal's unsolicited credit rating at BBB with a Stable outlook, based on the slight improvement of the country's socioeconomic and fiscal situation. However, we continue to point out the high levels of debt, being one of the main constraints on our rating. In addition, the Portuguese tourist sector continued as a growth driver at the beginning of the second quarter. In this sense, the flow of tourists evolved favorably in April 2022, presenting figures above those of April 2019 (+1.6% guests and +1.1% overnight stays). Likewise, the Portuguese INE has confirmed the quarterly growth reported in our previous bulletin, standing at 2.6% qoq (11.9% yoy). As for the labor market, it remained stable in April, with no change in the employed population and maintaining an unemployment rate of 5.8% of the labor force. Nevertheless, the CPI continued to soar in May, registering a year-on-year variation of 8.0% (7.2% in April), also highlighting Portugal's high core inflation (5.6%), although it registered a lower monthly variation than in recent months. The maintenance of high inflation rates together with supply chain constraints are already beginning to affect expectations and the industrial sector. In this sense, industrial production decreased in April for the first time this year (-1.8% yoy), after standing at positive rates in March (+0.7%). Furthermore, after rebounding in April, the economic climate indicator -which reflects supply-side expectations- decreased in manufacturing industry, trade and slightly in services. While consumer confidence rose, this rise was due to an improvement in economic perspectives, as expectations for purchases of goods declined, which could indicate a slowdown in consumption in May. On the other hand, the Portuguese Parliament approved the National Budget for 2022 on May 27, after being vetoed seven months ago, favored by the absolute majority of Antonio Costa. The new budget once again responds to the economic logic defended by the successive governments of António Costa, maintaining the commitment to budgetary consolidation, forecasting a reduction of the deficit to -1.9% of GDP in 2022, and to -1.0% in 2023. Moreover, the government already estimates a primary surplus for 2022, which will favor debt reduction, although it is expected to remain at high levels (120,7% of GDP in 2022).