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Less Rain in Spain Than On Europe’s Plain

Investors in the week ahead should receive a clearer picture of Spain’s economic health, with updates that include business confidence, inflation, as well as retail sales and manufacturing.

Spain’s central bank has recently touted its “notable dynamism” has been backed by domestic demand, despite the numerous headwinds and uncertainties faced by the broader euro area.

The Bank of Spain’s assessment of first quarter of 2019 GDP suggests its economy grew by around 0.6%, supported in large part by private consumption. The upbeat sentiment falls against a background of continuing swift job creation, an increase in purchasing power as a result of lower inflation, as well as stimulus to household income budgets.

Moreover, Spain’s economy is set to continue its expansion, with the central bank expecting GDP growth of 2.2% in 2019, and 1.9% and 1.7% in 2020 and 2021, respectively.

Some analysts agree the country has been undergoing substantial economic improvement, with markedly better credit conditions, while contending with a myriad of domestic challenges.

Fitch Ratings analysts Douglas Winslow and Michele Napolitano, for example, recently noted that Spain’s “strong economic recovery has been accompanied by a reduction in macroeconomic imbalances, including sustained current account surpluses, ongoing private sector deleveraging and further financial sector repair.”

Fitch noted that it expects “a gradual reduction in the very high level of general government debt,” from 97.1% of GDP in 2018 to 94.5% in 2020, which compares with the current peer group median of 48.6%.

Winslow and Napolitano also observed “steady improvement” in the Spanish banking sector, notably asset quality, which is converging with the EU average. They anticipate contained operating expenses and growth in commission income to support banks’ profitability and offset continued pressure from the low interest rate environment.

Fitch continued that Spanish banks’ capitalization levels are “satisfactory but at the low end compared with European peers”, amid “healthy” new lending growth that will likely turn “marginally positive” in 2019.

Spain’s star stands out

Against this backdrop, Spain continues to undergo political risk and uncertainty around Catalonia’s government policy of pursuing independence, and a still high unemployment rate.

Still, the country appears to be making strides in a continent struggling with a beleaguered German auto sector, rising protectionism, national protests in France, slowing growth in China, as well as fears about Brexit and budgetary policies and political shifts in Italy.

In fact, the European Central Bank (ECB) recently committed to combatting continued muted inflation across the Eurozone, amid lower prospects for growth, with a more dovish stance on monetary policy.

The central bank lowered its expectations for annual HICP across the board due in large part to its “more subdued near-term growth outlook.”

The ECB anticipates HICP inflation to come in at 1.2% in 2019, 1.5% in 2020 and 1.6% in 2021. In mid-December 2018, the ECB expected those rates to register 1.6%, 1.7% and 1.8%, respectively.

Euro area real GDP increased by 0.2% quarter-on-quarter in the fourth quarter of 2018, following growth of 0.1% in the third quarter on the back of a sharply weaker manufacturing sector. The ECB thinks real GDP will rise by 1.1% in 2019, 1.6% in 2020 and 1.5% in 2021, down from December’s outlook of 1.7% in 2019 and 2020.

In line with the ECB’s aim to ensure inflation remains on a sustained path towards levels that are below, but close to, 2% over the medium-term, the central bank at its latest monetary policy meeting elected to keep its key interest rates unchanged at 0.00% (main refinancing operations), 0.25% (marginal lending facility) and -0.40% (deposit facility), where they will most likely remain through the end of 2019.

Also, among other easing measures, the ECB said it will reintroduce its quarterly targeted longer-term refinancing operations (through a new TLTRO-III series), which will be launched in September 2019 and end in March 2021.’s chief market analyst Patrick O’Hare noted the ECB’s policy composition is not for “an economy in good form — far from it.  That is the policy composition for an economy that is stuck in a low-growth rut and is considered to be at risk of sinking further into that rut.”

Meanwhile, market participants are set to receive a slew of new data out of Spain in the week ahead, which is set to start off with an updated gauge of producer prices:

Monday, March 25

  • PPI (Feb)

Then by mid-week, Spain will provide a fresh outlook on:

Wednesday, March 27

  • Business Confidence (Mar)

It appears a long list of headwinds have taken a toll on business sentiment in February, underscored by national and broader European economic and political uncertainties, the progress of U.S.-China trade negotiations and Brexit.

However, IHS Markit economists noted that technological advancements, the development of new products and expansion into new international markets were all seen as factors that could support growth in the next year.

The net balance of firms expecting a rise in business activity is at +26% during February 2019. That is a

slight improvement on October’s reading of +23%, and Spain was the only nation in the EU to record such a rise in sentiment.

IHS Markit added that nonetheless, business confidence remains “historically low and amongst the weakest seen since early 2013.”

Meanwhile, in the latter part of the week, investors will get:

Thursday, March 28

  • CPI (Mar)

The consumer price index (CPI) has decelerated significantly from the end of 2018.

In February, CPI rose 1.1% year-on-year rate and by 0.7% over the prior month, with little signs of rising. Categories in the latest month that showed an upswing in prices included transportation, amid higher fuel costs, as well as food and soft beverages, highlighted by increases in the prices of vegetables.

The Bank of Spain noted that while it expects CPI growth to increase over the near- and medium-term, reflecting a gradual rise in the positive output gap and higher unit labor costs, external risks such as posed by US-China trade talks and Brexit tilt risks to the downside.

The central bank proposed that the “future economic policy agenda in Spain will have to focus on reducing the economy’s vulnerability to shocks and fostering potential growth.”

Elsewhere, ahead of the weekend, Spain will release:

Friday, March 29

  • GDP (Q4’18 – F)
  • Retail Sales (Feb)

And coming off the weekend:

Monday, April 1

  • Markit Manufacturing PMI (Mar)

Spain’s manufacturing sector suffered its first decline in new orders since July 2016, amid weaker foreign demand and stagnating employment.

The IHS Markit Spain Manufacturing PMI slipped into contraction territory at 49.9 in February – the first time in almost six years – down from 52.4 in January.

Paul Smith, economics director at IHS Markit, said that “February proved to be a challenging month for Spain’s manufacturers.

“Undermined by a first deterioration in order books for over two-and-a-half years, latest data showed that a run of continuous growth that stretched to over five years finally came to an end.”

Smith added that the “slowdown in the sector is closely aligned with an increasingly challenging global manufacturing climate, especially in fellow European countries. Worries over Brexit and ongoing challenges in the automotive industry are weighing on demand, especially for capital goods producers who suffered particularly noticeable drops in output and new work during the month.”

Investors will likely be keeping an eye on Spain’s manufacturing and business service sector activity, as well as the numerous drivers that could pose adverse impacts to the country’s overall rate of growth.

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The analysis in this material is provided by Interactive Brokers for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by Interactive Brokers to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Steven Levine

Steven Levine is a Senior Market Analyst at Interactive Brokers, (IBKR), which provides online trade execution and clearing services to institutional, professional and individual investors for a wide variety of electronically traded products including stocks, options, futures, forex, bonds, CFDs and funds worldwide.

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