WHAT CAN WE EXPECT FROM THE ECONOMY IN 2019?
Usually, I don’t like making predictions about the economy, as some other professional economists do, by telling us when the next recession will be, or trying to predict the exact rates of growth or inflation. Normally, these tend to be just fallacies, which in many occasions are even controversial between them. That’s why, when I write articles, or even in my books, I tend to quote the source from which I have extracted the data, and even refer to what certain study or report I’ve obtained it from. That’s why, this year it’s not going to be different, and instead of putting random numbers myself, I’ll just comment on already made predictions and how these various possibilities could affect the international and Spanish environment, following several reports from the IMF, the European Commission, the World Bank…
To be honest, there’s one thing on which most of these reports coincide, and it’s the bad perspectives for the future of the global, and concretely, the European and Spanish economies over the next few months and years. The Economist even concluded in a recent article that a new recession was just a matter of time, and it couldn’t be prevented anymore, now the game was based on guessing or studying what will cause it and what effects it will have. The EC asserted that a severe slowdown in growth was just a matter of six months or less; as their growth expectations for 2019 were 0.5% lower that for the previous year. From these predictions we shouldn’t think they are being pessimistic, as their usual error is being pretty overoptimistic and generating an excess of confidence on economic agents, inflating bubbles even more. Reality could be even worse, as it will happen in Spain, for example, if Pedro Sanchez wins over the next general elections. We need to bear in mind that Spain is right now the only country in the whole of the OECD rising taxes and bureaucratic burdens to firms and new capital entering the market, which has been directly leading to an enormous outflow of more than 15,000 million euros of foreign investment over the last few months.
The clear worsening of the global economy, on the other hand, shouldn’t surprise us at all, as circumstances are well known by everybody minimally interested in politics or economics. The enormous volatility in the price of petrol, which generates an enormous uncertainty in the economy; the unclear future of the Chinese economy, which has reduced its growth expectations from 6.9% down to 6.5%, and still has an overall debt burden of 250%/GDP; followed by the Turkish economic crisis, with severe devaluations of the Lira and hard losses of competitiveness, with a pretty similar case in Argentina (with higher inflationary levels). Also Italy, with its expansionary and illegitimate budget has caused the European Commission to stand up against it, as it breaks by far the Maastricht Treaty and all budgetary balance restrictions. Brexit should also worry us, as a contraction in trade volumes between the EU and the UK will lead to fewer and worse economic perspectives for the whole of Europe, by leading to tremendous unemployment in some sectors, consequently causing an appalling loss of productivity and efficiency by breaking up many production and business chains.
The sovereign debt cancer is still present, Italy has still got a level of public debt of more than 130%/GDP, with Greece rounding up to nearly 175%/GDP of public debt, and our beloved Spain with 98.5%/GDP debt levels. These are clear examples of over indebted states that trusted everything to pro-Keynesian policies which just prolonged the recession and sent the bill to future generations. Near-zero interest rates, or even negative rates during the last 10 years haven’t helped either, but what for sure does even still perpetuate this harm are 0% interest nowadays… on the top of the wave! This irresponsible policy is just a way of postponing harm in time, but not an escape from it. The ECB should be following the Fed’s path, and start tightening monetary policy to stop giving away free money directed at unproductive uses. The future of European monetary policy won’t be based just on the economic environment (sadly), but it will be largely affected by pressures from populist parties, as Lega Norte in Italy, or the “Popular Front” government in Spain, formed by socialists, neo-communists and separatists, which base their support to the General State Budget just on their own arrogant political interests. This won’t do any good.
Good news were published recently, when we got to know that the Spanish Senate, controlled by the PP (the Spanish conservative party) blocked the deficit leasing policy the Socialist government proposed, by obliging them to comply with the 1.3 deficit objective, set by the previous government, and which fits the limits established by the EC for Spain. Some people might think than a 0.5% increase in deficit is something worriless, but they are seriously mistaken if they still believe this. Just to let you know, 0.5% deficit represents approximately 5.000 million euros, which is close to the hyper-inflated estimations of extra fiscal income the Socialist government has published, and which have been corrected downwards more than 40% by the Banco de España.
There will always be a future recession, “It's the economy, stupid.”, as George H.W. Bush once stated. Yes, it’s the economic cycle and that’s how booms and busts work. We need to assume that we (well, central banks, politicians and bureaucrats, actually…) are hyperinflating a tremendous sovereign debt bubble that will unscrupulously explode when growth rates and productivity levels normalize once again. We should firmly prepare for the next recession by reducing deficit levels to minimum, followed by serious contractions of debt to GDP levels. EU rules establish that no country should have a public debt level to GDP ratio of higher than 60%, and if we want to comply with it, not only for the sake of the EU, but also for our financial health, the government should promote several supply-side measures and spending cuts; serious spending cuts. It doesn’t seem as if Spanish socialists were going to do it, anyway.
We can still expect fine and acceptable economic perspectives for 2019, worse than last year, but with noticeable positive economic growth still. Even though, as a high indebted country, we should already be suffering a heavy fiscal consolidation programme, by eliminating unnecessary spending and bureaucratic burdens, followed by severe cuts in excessive taxation to the ones who promote capital accumulation and productive investment; mainly firms. A sensible economic policy for next year won’t include spending more, but spending less and better. Fiscal responsibility shouldn’t be just present on a couple of our national political parties’ economic programmes, but in all of them. Responsibility is not ideology, has never been and will never be. The global economy, and not just Spain, requires a severe injection of Austrian School economics.
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