MacroEconomic Bulletin - Second Half of June 2022

28th June of 2022

GLOBAL OUTLOOK

· Inflation does not let up. High inflation continues to appear as one of the biggest concerns in most of global economies nowadays. The euro zone CPI registered in May an 8.1% yoy growth (seven tenths of a percentage point more than in April, 7.4%) continuing at record highs, while core inflation reached 4.4% yoy accounting for 46% of overall inflation, two points more than in April. This situation could be tightened by Moscow's latest strategy against Europe: to use gas as an instrument of pressure and, at the same time, to benefit from the price increase resulting from the reduction in supply.

In this sense, exports to Italy and Slovakia have been halved and those to France have been completely suspended, while Germany, whose dependence on gas exports is considerably high, has suffered a power outage. On the other hand, U.S. inflation data was also released last week, registering a CPI yoy growth of 8.6% in May (three tenths over April’s figure, 8.3%), where also core inflation, which stood at 6% (6.2% in April) explained more than half of overall inflation (55%). Although just 3% of crude oil imports and 1% of total crude oil processed by US refineries derive from Russia and the fact that the U.S. is a net gas exporter, they depend on other energy products that export from Russia and for which exist shortages in international markets, such as uranium or on key inputs for semiconductors and transport equipment, as palladium, argon, neon. This is also explained by domestic pressures, where core inflationary pressure is increasing as result of strong demand that continues to run up against supply, jeopardizing the purchasing power of households.

· Central Banks. On June 15, the Fed Board and Federal Open Market Committee (FOMC) decided by vote to raise the target range for the federal funds rate from 0.75-1% to 1.5-1.75% (+0.75) and anticipates again that ‘ongoing increases in the target range will be appropriate’ in their commitment to returning inflation to its 2% objective in a scenario of high uncertainty and increasing inflation. In addition, the FOMC will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May’s last meeting. On the other hand, on June 7, the Reserve Bank of Australia (RBA) made a further unexpected rate hike of 0.50 points (following the 0.25 points hike at its last meeting in May), bringing the benchmark rate to 0.85%, making it clear that it will continue to strive to bring inflation down to its 3% target next year, after it exceeded 5% at the end of the first quarter.

· Ad hoc ECB meeting in response to an unstoppable rise in risk premiums. Following the ECB's new step towards the normalization of monetary policy, decided at its last meeting, when announced to raise the key ECB interest rates by 0.25 points at its July monetary policy meeting -and a possible larger increment at the September meeting, if necessary-, and to end net asset purchases under its asset purchase programme (APP) as of 1 July 2022, they met extraordinarily on June 15 in response to rising risk premiums in peripheral countries. The advancement of ECB rate hike expectations, and the end of the asset purchase program have driven long-term debt yields higher (bearing in mind that, the ECB's net debt purchases since 2015 have been driving artificially low yields) while eurozone country risk premiums are also increasing, highlighting the rapid rise in peripheral countries, but still far from reaching the levels of the 2011-2012 European debt crisis. In this sense, and to avoid the episodes of the last crisis, the ECB rapidly stressed the importance of design new measures -subject to high inflation- to contain this risk and, at the same time, reminded the flexibility of the reinvestments under the PEPP that can be adjusted across time to face this renewed market fragmentation. Although there are still many details to be known, peripheral risk premiums have moderated. We will have to wait for the monetary authorities to present an instrument to purchase sovereign debt from these same countries, to know more details about the roadmap to be followed. Until then, managing expectations will be key to contain a new sovereign debt crisis in the euro zone, both from the ECB and the sovereigns, implementing a realistic and credible fiscal consolidation plan.

SPANISH OUTLOOK

Among the indicators published this last week and a half, we highlight some conjunctural figures that give us an idea of the evolution of the Spanish economy during the first and the beginning of the second quarter 2022, since the first definitive indicators on second quarter performance will be released in the next few weeks. In this sense, and according to the Q1 service sector price index, of the 15 service activities for which the INE compiles an index, 13 have increased compared to the same period in 2021. The increase in air passenger transport prices has been 8.5% (+2.5 points compared to the Q4 2021), the highest increase of all the subsectors, recording its highest yoy rise since the first quarter of 2009, mainly explained by the tourist reactivation that experienced this year compared with the beginning of 2021. Regarding April figures, the ex-calendar monthly variation of the Services Sector Activity Indicators (IASS in Spanish) reached 7.0% and annual rate stood at 25.4%, while the ex-calendar monthly variation of the General Industrial Turnover Index (ICN) was 15.8% and the annual rate reached 27.4%. Both figures point to a positive performance of Services and Industrial sectors during April compared to the previous month and the same period last year, although considering calendar and seasonal effects (where the effects of price variations in the same are adjusted), the annual improvement is slightly trimmed, pointing, as we have been emphasizing in recent bulletins, to the significant effects of inflation on overall performance in 2022. This scenario of uncertainty and high prices continues to drive downward revisions of Spanish growth. As on the last bulletin we highlighted the OECD revision of Spanish GDP growth (to 4.1% yoy in 2022 and 3.1% in 2023), the Bank of Spain (BdE) revised last week downwards its forecast to 4.1% for GDP growth for 2022 (-0.4, mainly due to lower-than-expected GDP growth in the first quarter) and to 2.8% in 2023 (-0.1). For this reason, Spanish President of the Government, Pedro Sánchez, has announced a reduction in the VAT on electricity from current 10% to 5%, as part of the measures of the new anti-crisis measure package. Finally, on June 19, the autonomic elections of the Spanish region of Andalusia took place. These elections have left a very different result from last decades: the People’s Party (PP) has reached, for the first time in its history, the absolute majority (58 seats out of 109, +32 than in the 2018 elections), while the Socialist Party has reduced its number of representatives to become the second force (30 seats, -3). This means the continuity of the management of the Andalusian government led by the PP in recent years, which does not need the favorable vote of Vox (12 seats, +2) for the formation of the government of the Junta de Andalucía. On the other hand, the new left party coalition Por Andalucía got 5 seats, while Adelante Andalucía (Podemos’ regional party) got 2 seats (-15).

FRENCH OUTLOOK

The flash inflation data advanced in our previous macroeconomic bulletin was confirmed, standing the CPI at 5.2% yoy in May 2022 (4.8% in April) and, after the slight slowdown in April, the monthly variation rebounded again to 0.7% (0.4% in April). Once again, the main driver of inflation was energy (+27.8% yoy), although as we already warned, the rise in prices is generalize nowadays, therefore, followed by food (+4.3%), services (+3.2%) and manufacturing products (+3.2%). Thus, core inflation continued to increase to 3.7% yoy (3.2% in April). Accordingly, the price of frequently purchased goods sold in hyper and supermarkets rose significantly up to 4.1% yoy (+2.9% in April), having a greater effect on daily consumption. As for other products, data on the price evolution of imported goods have also been published. In this sense, oil prices increased again (+10.6%) after the drop in April, being one of the main causes of the rebound in inflation in May. However, the price of imported raw materials (excluding energy) decreased for the first time since November 2021 (-3.7% yoy), mainly due to industrial raw material prices (-9.1%), as food increased (+1.1% although to a lesser extent than in April (5.1%). Moreover, labor costs increased in the first quarter of 2022 by 2.8% qoq, which could partly reflect a slight indexation of inflation, although it would be below the general increase in prices so that the overall effect would remain negative on the purchasing power of the population. Although these figures include the end of some employment support policies, so they might be a slightly biased. On the other hand, the second round of the French legislative elections took place on June 19, where the expectations of a greater parliamentary fragmentation were confirmed. In this sense, the center-right coalition Esemble Citoyens won, although it lost seats, falling from 577 in the 2017 legislative elections to 244. In addition, the left-wing alliance, NUPES, came second with 127 seats, and the significant rise of the extreme right, which obtained 89 deputies. As a result, political instability increases slightly, since there is no certainty regarding possible government coalitions, besides the fact that the new government will rule in a minority. Likewise, it will not be until June 28 that the president of the national assembly will be elected, and the definitive parliamentary groups will be formed.

PORTUGUESE OUTLOOK

New figures regarding April 2022 were released in the last few weeks, which point to a maintenance of activity in Portugal. In this sense, both the services sector and industry presented a positive turnover variation (+23.6% yoy and +19.7% respectively), although both below the levels presented in March (down by 9.1 p.p and by 6.4 p.p respectively). Nevertheless, the situation of the foreign sector continued to worsen in April, the rise in prices is affecting the trade balance of goods, although both exports (+17.3% yoy) and imports (+29.2% yoy) increased, the latter to a greater extent. Thus, the deficit of the trade balance in goods has increased by 1039 million compared to the same month of 2021, although without considering fuels and lubricants, the increase would be lower, up to 465 million. On the other hand, the inflation data for May 2022 that we advanced in our previous bulletin was confirmed, with inflation standing at 8.0% yoy (7.2% in April). Likewise, and highly influenced by the upward trend in food prices, core inflation continued to grow to 5.6% yoy (5.0% in April). Once again, the main driver was energy prices (+27.3% yoy), followed by the rate of unprocessed food (+11.6% yoy). Similarly, the variation of industrial prices remains high (+24.5% yoy), although slightly below that of April (24.7%). Excluding the effect of energy and raw materials, the annual variation was 10.3% (9.5% in April). As we advanced, the rise in prices has led to a change in the tone of the ECB's monetary policy, which announced a rate hike for the third quarter. As a result, the risk premiums of the peripheral countries increased considerably. This is the case of Portugal, with a public debt of 125.4% of its GDP in 2021, whose risk premium increased to 137 points and the yield on the 10-year bond to 3.1 points after the ECB’s announcement. However, following the announcement of a new measure to ensure the non-fragmentation of the European debt market, this situation normalized slightly to 104 points and 2.8 points respectively. Although Portugal's public finances are in a better position than other peripheral countries, with a primary surplus that guarantees a natural reduction of its debt, this situation is a reminder of the most indebted countries exposure to exogenous shocks.