"A global economic recession is not the base scenario in the short-term"

Thus, he estimates that the global economy will grow 3.2 percent in 2019 and 3.1 percent in 2020, while the eurozone is predicted to grow 1.1 percent in 2019 and 0.8 percent in 2020. At a round table discussion with Margarita Delgado, Deputy Governor of the Bank of Spain;  José Luis Escrivá Belmonte, Chairman of the Independent Authority for Spanish Fiscal Responsibility (AIREF in Spanish); and economist Alfredo Pastor, José Manuel González-Páramo analyzed the two key factors that explain this economic performance.

The first is the increase in protectionism, which is behind the slowdown in global activity since the middle of last year. In this regard, he stated that despite the U.S. and China resuming negotiations and the possibility of the countries signing the “first phase” of a trade agreement, “uncertainty remains”.

José Manuel González-Páramo feels that the atmosphere of distrust among investors generated by this protectionism is behind the global economy’s worst performance of the past two years, following the sharp increase in global trade and GDP in 2017.

This situation has led to significant loss of momentum in exports and in the manufacturing sector, especially in China and the eurozone, but also in the U.S.  In this climate, he warned: “Growth is not transferred from one region to another. Instead, it’s a situation where everyone loses.”

Other examples of rising protectionism are the renegotiation of the North American Free Trade Agreement (NAFTA), which has led to a new agreement (the U.S. - Mexico - Canada Agreement (USMCA)), still pending ratification; and the increase in tariffs in sectors like steel, aluminum and automobiles.

The second factor that explains the global economic performance is central banks’ countercyclical policies.  José Manuel González-Páramo also recalled the importance of the U.S. Federal Reserve and the European Central Bank’s quantitative easing measures.

However, in his opinion, even though this reaction from central banks has mitigated the negative impact from the uncertainty created by the trade war, it would be ideal to respond with supply-side measures that make it possible to raise the growth potential, and provide support with an optimal combination of policies. In this regard, he mentioned growing questions over the ability of monetary policy to provide additional stimulus for economic activity.

For this reason, BBVA’s Executive Board Member thinks it is reasonable to use fiscal policy to complement monetary policy with little room to maneuver. José Manuel González-Páramo recalled the “interesting debate” over the coordination between both types of policies, and underscored two very important elements in this: fiscal rules continue to be necessary and central banks’ independence cannot be in question.