17 oct 2018
CEOE’s Economic Outlook

INCREASE IN EXPENDITURES WILL HINDER THE SUSTAINABILITY OF THE PUBLIC ACCOUNTS

CEOE warns about the slowdown in the foreign sector and believes protectionism is a global risk that is already materializing

“The Budgetary Plan for 2019 presented by the Government is characterized by increased social spending, it makes no mention of expenditures on sectoral and investment policies and it includes a tax increase, especially for the business sector”. This is one of the conclusions of the Economic Outlook document prepared by the Research Unit under CEOE’s Economic and European Affairs Department CEOE, in which they warn that “the budgetary and fiscal policy mix is not appropriate to enable a consolidation of the Spanish economy’s expansive cycle”.

Panorama de la economía
Panorama de la economía — ©Dreamstime

In fact, the Confederation highlights that “with such high public debt levels, increasing spending that becomes structural is an obstacle to the sustainability of public accounts in the medium and long term, especially within a context of economic slowdown”.

CEOE’s Research Unit stresses that the slowdown of the Spanish economy started at the beginning of 2018 and that “the most negative sign is the change in the composition of that growth”, with a decrease from the foreign sector not seen since pre-crisis times. “Exports are losing steam and, for the first time in recent years, they have a lower momentum than the European average”, the report informs. In addition, the report recalls that the number of people registered with the social security continues to slowdown progressively and closes the third quarter with a y-o-y growth of 2.9%, two tenths lower than in the previous quarter.

Therefore, CEOE points out “the need to reinstall measures aimed at increasing competitiveness if we wish to maintain the balanced growth pattern that has characterized the current recovery cycle”.

The report recalls the forecasts for the Spanish economy for 2018 and 2019, which have been revised downward once again. The Government has lowered GDP growth estimations for 2018 by one tenth, setting it at 2.6%, and for 2019, down to 2.3%. The Bank of Spain and the IMF have also lowered their forecast for GDP growth in 2018, now at 2.6% and 2.7%, respectively, and they both forecast the same rate for 2019, setting it at 2.2%. These institutions base their diagnosis on the maturity of the economic cycle, the need to get on with the reforms process, the environment of economic uncertainty associated with protectionism, the weakening of emerging economies and the expansionary bias of the announced measures regarding budgetary policy”, states CEOE’s Economic Outlook.

International economy

At an international level, the Federal Reserve raised interest rates for the third time this year and oil prices are recording the highest level since 2014, mostly due to sanctions on Iran. Regarding the risks luring over the global economy, the report recalls that some have already partly materialized, such as the increase in trade barriers or the capital outflows from some of the emerging economies. However, it also points out that the situation could become worse if the monetary policies in advanced economies were to tighten faster than expected, because financing for certain emerging markets would be more difficult. It also warns that increased trade tensions could dampen investment and hinder international trades. Other risks, such as the possible failure of Brexit negotiations or geopolitical tensions, also increase uncertainty over the evolution of the global economy, says CEOE’s Research Unit.