The Current Economy Warrants New Optimism

23 Mar 2018

“The situation right now is very favorable, and to a great extent justifies the optimism that seems to characterize every opinion about the economy – quite the opposite of how we felt about it at this time last year,” according to Juan José Toribio, emeritus professor of economics at IESE.

Juan José Toribio shared with a small group of executives of Navarrese businesses his local and global analysis and macroeconomic perspectives, spurring an interesting debate about the challenges and risks for different sectors, and gave an interview to the Diario de Noticias de Navarra, excerpts of which are translated here:

What was bothering us at the beginning of 2017?

We were very worried then about the possible effects of Trump’s economy – ‘Trumpconomics’ - the possibility that there would be a hard landing in China as a consequence of the Chinese economy’s financial problems, the excessive debt, etc. And we were also very worried about the potential effects of Brexit in Europe – not only the trade-related ones specific to the break – but also its effects on confidence in the survival of the European Union, euro zone continuity and the euro as a currency, which could have led again to an atmosphere of distrust like that of 2012.

And what has changed between then and now in the American economic policy?

When we look at the effects of Trump’s economy, we notice that protectionism has been more rhetorical than real, because the truth is that the world trade figures for 2017 reveal an increase, after six or seven years of having been more or less steady.  So if there has been any protectionist action on the part of the Trump administration, it seems not to have served its purpose at all. On the other hand, however, tax reform, which has also been more moderate than originally expected, can give the American economy the push we need.

China’s problems are of another sort.

With respect to the fears we had about China, if they haven’t been resolved over the course of this year, at least they haven’t gotten much worse either. We’re talking about a country that has private (family and business) debt that is much higher than any other country in the world – above 250% of the GDP – much higher than in the United States or Europe. Eventually that is going to have to be adjusted.  But it is also true that China is a country with a high savings rate, because of which it has the luxury of making that adjustment gradually, which we didn’t see a year ago.

So we are left with Brexit.

Because we managed to negotiate with the British with one voice, and also because of the stance the British themselves have taken - which is more moderate than was anticipated – the truth is that we’ve managed to get an initial agreement at least regarding the cost of the divorce, and most importantly, we haven’t seen any effects from lack of confidence of the EU of the euro itself. On the contrary, what is on the table at the moment is a roadmap to consolidate the EU. Important decisions will have to be made on this front at this year’s July summit. So we are actually better off than before.

Is all of this reason enough for the current optimism?

The three issues have developed well and have given rise to the current situation of overriding optimism – largely justified by the fact that economic growth is higher than predicted. Globally, growth is 3.9%, with 2.7% in the US and almost 2.5% in Europe. But above all, the composition of that growth is very healthy.  It’s growth based much more in investment – which generates employment – than it was in other historic periods; it’s growth without inflation, in which imbalances seem less pronounced than in other periods with similar rates of expansion. So we could say it’s a much more sustainable growth. And this is what I think is feeding optimism, which is not to say that we won’t have problems; there will always be problems. 

Is the appreciation of the euro with respect to the dollar responsible for Brexit getting more expensive, or should we also blame the ECB’s monetary policies?

I think both are causes. Faced with the increasing interest rates in the US, measured at ten years of North American public debt, one might think that the dollar would appreciate and that all this was the expected effect of what we call “trumpconomics,” yet what we have also seen is that as the ECB’s debt purchases have gone down from 80 billion to 60 billion and now to 30 billion as of January 1, we are witnessing a long-term interest rate increase in Europe that is not inferior - and is even more notable in terms of German bonds than US bonds – and so the differential between the interest rates has not favored the appreciation of the dollar, but rather just the opposite.

And at the same time, confidence in the European currency has been bolstered by the reasonableness with which Brexit seems to be resolving itself.

  Read the whole original interview in Spanish:  “The World’s Economic Situation Today Merits Optimism”