What is happening in the global economy?

Manuel Balmaseda, Alicia García Herrero and Pedro Antonio Merino

On 8 April 2020, the Rafael del Pino Foundation organised a live dialogue on www.frdelpino.es entitled "What is happening in the global economy?" with the participation of Manuel Balmaseda, Alicia García Herrero and Pedro Antonio Merino.

Manuel Balmaseda is Chief Economist at CEMEX, a leading global building materials corporation. Previously he was Chief Economist for Spain and Europe at BBVA, Chief Economist for Capital Markets at BBVA, professor of economics at CEMFI and visiting fellow at the Federal Reserve Bank in Minneapolis. He has worked at the IESE Business School in Madrid, the EOI (Escuela de Organización Industrial) in Madrid and the Helsinki School of Economics. He collaborates with the IMF, the EU Commission, the OECD, the South American General Secretariat and other private organisations on issues related to the economic outlook and policy action in the United States, the Eurozone, Latin America and Spain, and in particular, issues related to the construction sector, real estate markets and fiscal and monetary developments. Balmaseda holds a PhD in economics from Northwestern University and a BA in economics, government and mathematics-computing from Colby College. He is a member of several international organisations: the ECB Shadow Council, ICBE (International Conference of Business Economists), EMNET (Emerging Market Network), the Global Interdependence Council, NBEIC (National Business Economic Issues Council), the Board of Directors of NABE (National Association of Business Economics) in the United States and the Grupo de Expertos de Coyuntura in Spain, among other economic organisations. His current professional interests focus on international economic developments, construction and real estate market developments, the economic impact of fiscal consolidation, crisis resolution and institutional and market reform. Balmaseda participates in conferences on these and other topics and has published numerous articles in academic journals and books and in the press.

Alicia García Herrero is a Senior Research Associate at the Elcano Royal Institute, Chief Asia-Pacific Economist at NATIXIS, Senior Fellow at Bruegel and Non-Resident Research Fellow at the Emerging Market Research Institute of Johnson Cornell University. She is currently an adjunct professor at the City University of Hong Kong, and a visiting professor at the University of Science and Technology (UST) and the China-Europe International Business School (CEIBS). Previously, Alicia García Herrero has been Chief Economist for Emerging Markets at BBVA, member of the Asia Research Programme at the Bank of International Settlements (BIS), head of the International Economics Department at the Bank of Spain, member of the Executive Board of the European Central Bank, head of Emerging Economies in the Research Department of Banco Santander and economist at the International Monetary Fund. With a PhD in Economics from George Washington University, she has published numerous books and articles in specialised academic journals.

Pedro Antonio Merino holds a degree in Economics from the Universidad Autónoma de Madrid and an MBA from the Instituto de Administración de Empresas (IADE). He has also taken several courses on international economics at CEMFI and Harvard. He is currently Director of Studies and Chief Economist at Repsol. In the financial field, he worked in the Directorate General of the Treasury and Financial Policy where he was Deputy Assistant Director of Public Debt and Deputy Director of Relations with International Monetary Organisations. He was also secretary of the Interministerial Commission for the introduction of the euro in the Public Administrations, advisor to the European Investment Bank (EIB), alternate member of the Monetary Committee of the European Union and advisor to the Executive Director for Spain at the International Monetary Fund. In 2000 he joined Repsol as Director of Studies and Chief Economist, where he has carried out and continues to carry out macroeconomic and energy forecasting and analysis, especially oil and gas, as well as advising on strategic issues and the geopolitical environment. Antonio is a member of the International Association of Energy Economists (IAEE), the American Association of Business Economists, the Oxford Energy Policy Club, the Spanish Economists Group, a reviewer for the International Energy Agency's World Energy Outlook and a member of the International Energy Forum's long-term energy forecasting analysis group.


On 8 April 2020, the Rafael del Pino Foundation organised the online dialogue on "What is happening in the global economy?", in which Manuel Balmaseda, Chief Economist at CEMEX; Alicia García Herrero, Chief Asia-Pacific Economist at NATIXIS, and Pedro Antonio Merino, Director of Studies and Chief Economist at REPSOL, participated. Alicia García Herrero drew attention to the fact that Asia's reaction in the first instance to the coronavirus crisis was quite different from that of Europe. These countries are now in a second phase of contagion, which they call the importation of cases from Europe and the United States. In that first phase, only 60 million people were confined, all of them in Hubei province. In the rest of the country, on the other hand, there were no confinements. Mobility has therefore been much higher. Even so, the economic impact across Asia is dramatic. The exception, so far, is Taiwan. The other countries, however, are very likely to go into recession. The greater the lack of mobility and the longer it lasts, the greater the impact will be. Asia has reacted a little late in terms of monetary and fiscal policies. This is a lesson to be learned. Fiscal packages are still being prepared or announced there. Ideally, governments should have taken preventive economic measures to avoid such a strong shock to the economy. Manuel Balmaseda added that the measures that have been taken in the United States and Europe are very different because they weight different things differently. However, Europeans and Americans should have learned from Asia and taken health, monetary and fiscal measures. The economic measures have been much quicker, but the health measures, however, have come a bit late. It was a bit delusional, especially on the part of the Americans, to think that the contagion would not come out of Asia. Nevertheless, the monetary and fiscal response in the United States was much quicker. There have been three simultaneous shocks in this crisis: the health shock of the coronavirus; the financial shock, in the form of the spectacular adjustment of the markets; and the oil shock, due to the rise in oil prices, which affected even more than the other two. As Europe and the United States were already acting in response to the financial shock, they were able to respond more quickly to the coronavirus. This has helped them. As a result, financial markets are now relatively stabilised. As far as fiscal policy is concerned, the United States has been very aggressive. So has Germany, with a spending package of more than 20% of GDP. But, more than the magnitude, the important thing has to be the speed and flexibility with which these stimuli reach citizens and the economy. These stimuli have been put in place to keep the economy buoyant while the production slowdown was taking place, to keep the economy in the ICU. But that is all they are good for. There is still one part left, which is the response to a crisis of confidence and the measures to be taken to overcome it. Right now there are two priorities, saving lives and saving livelihoods, so that the economy can return to growth after the crisis. That is where we have to start focusing. Regarding the way out of the crisis, Manuel Balmaseda indicated that each economy is affected differently. There are three factors to take into account here: the depth of the shock, its duration and the recovery or exit from the crisis. The deeper and longer the shock, the more difficult and costly the exit will be. There are countries that have taken measures against mobility, especially in Latin America, because their health systems do not have the capacity to withstand what European systems have endured. But this has come at a very high economic cost due to the low income levels of these nations. There are a number of sectors that are going to be much more damaged, because the losses that occur now are not going to be able to be recovered, for example, in services such as tourism and hospitality, which are going to be difficult to recover once the crisis is over. This is already the case and will also be the case at the end of the crisis. Something similar is also happening in retail trade, and to a lesser extent in construction and manufacturing. According to Alicia García Herrero, this crisis is particularly hard because it implies a loss of level that cannot be recovered. Moreover, the lack of mobility means that the shock is particularly strong for the labour factor. Therefore, any country that depends on employment-intensive services will suffer more, especially if they are services that are not easily replaced by online work. This kind of shock is especially negative for important sectors of the Spanish economy. Pedro Antonio Merino added that there is a fundamental element. It is the prices of raw materials, which are closely linked to the evolution of the manufacturing industry, which is why they have fallen. In the case of oil, this fall has been increased by the price war. A key component of this situation is that oil-producing countries account for 17% of global GDP, and commodity-producing countries account for 25%. These nations have issued $25 trillion worth of debt. This has brought about the near collapse of the US fund market. This is the first additional effect of the oil and commodity crisis. Mobility, which accounts for 60% of oil demand, has fallen by 70%, except for commodities. Therefore, if there is no production cut by OPEC, we will have a lot of problems and we will see a lot of increases in the Fed's balance sheet because these countries are trying to obtain liquidity by selling their assets directly or through repos. Alicia García Herrero drew attention to one question: what kind of economic reality we are going to live in when we come out of the crisis. A reality that does not necessarily have to be the same as when we entered it. In fact, it was not the same before Trump arrived, or Xi Jiping in 2013. Since 2008, the reality has been shifting towards a de-globalisation of global value chains, of trade, even of finance. Now, with the coronavirus, the globalisation of people is collapsing. The question, therefore, is to what level of globalisation we are going back to, whether we are going back to the initial level. My impression is that we are not. We are going to a reality of a world divided into two great hegemonic powers, separated by who was to blame for the coronavirus. It is going to be more difficult to defend this globalisation. This is going to affect us directly. Manuel Balmaseda also acknowledged that we are in a process of shrinking globalisation that is not new. The coronavirus brings it back to the table with more important reasons, such as health. We are going to have a process of de-globalisation, or rather an important change in value chains, because they are going to have to be diversified. We will surely find a more regional process of value chains. A country like Mexico can benefit from this. The same can be said for the peripheral countries in Europe with respect to Germany. The problem is that Germany is dependent on China. The part that will come back is tourism, but it will take longer because it depends on income, which will take longer to recover. It is the sector that will be hit the hardest by this crisis. That's why we have to sell measures, such as quality of health and protection, to ensure that tourists are covered. We should already be thinking about that. The question is how you position yourself. For that you have to think beyond the crisis. Pedro Antonio Merino pointed out that this crisis is fundamentally a service sector crisis. This is not a crisis of industrial value chains. In that area there was already a process of regionalisation and the current situation is going to accelerate it in some sectors. Nor do we know how we are going to get out of it because the supply shock is amplifying the demand shock. It is too early to say that value chains are going to unravel. Also, people think that Southeast Asia is still cheaper, but GDP there is highly concentrated in mega-cities and it is going to be very difficult for the confinement not to be very prolonged. If inventories run out, there is a problem with those chains. In fact, we are not yet in that situation, but we are on the verge of it. Manuel Balmaseda clarified that it is not that global value chains are going to break down, but that there is a need to generate new chains because now they all start from the same place: China. There is going to be a diversification of value chains, which will benefit some places where they are not currently installed. That is where countries that do not participate much in them have a role to play. Alicia García Herrero does not see a break-up of value chains either, because they are very much focused on China. In intermediate products, for example, it represents 32% of world production. But there is going to be diversification, because of the problems we have experienced with medical equipment and other goods, which means depending on a single origin for 70% or 80% of production. We are not going to go back to this reality. It will be reduced and other countries will be used to meet Asian demand. And, for Europe, it is preferable to have another production centre in Europe that does not make it dependent on a single hub. This can be very favourable for Spain, but we have to be prepared to compete with countries like Portugal, Greece and other lower-wage countries. We can compete with them with advantages such as internet network capacity. Also through favourable taxation to attract productive direct investment, because employment in the service sector after the crisis is going to be limited, but for that we have to attract investment. Countries are desperately looking for production centres. Taxation is crucial for these companies. When it comes to analysing the Spanish economy's exit from the crisis, Pedro Antonio Merino stressed that two elements must be taken into account: how fast we are going to exit and whether we will be more influenced differentially. If we think about 2021, whether there is any sector capable of taking advantage of the doubts about the value chains, we must ask ourselves how to ensure that the companies that currently exist do not disappear. What is worrying is to ensure that companies do not close and that the impact on demand does not lead to such a strong crisis, because companies will take time to rebuild their balance sheets and hire people, which will delay decisions on consumption or the purchase of housing. This puts almost 40% of the Spanish economy at risk. That is why it has to be in the best possible condition for when the recovery comes. Manuel Balmaseda distinguished between containment measures and reaction measures. So far we have had measures to maintain the productive structure, such as aid to companies and families, but at some point we will have to get in front of the situation and start thinking about economic policy decisions. People are afraid and one of the things we have to do is to educate them. GDP in all countries is going to be in pretty deep recessions, the deepest since the Great Depression or even worse. The fall in GDP in the United States is 9%, in Germany 4%, in France 6%, in Spain 8%. What we still have is a very tough but short recession, because this is not a normal recession; this has been a standstill in activity and that has a radical impact on the economy. In that sense, Spain has to start doing its homework properly. The central banks' measures would have been unthinkable a few years ago, but they have done their job. It is Europe that is not doing its job, and this could lead to a crisis in a couple of years' time, as the financial crisis did, but with worse consequences. In Spain, part of the problems we are going to have are debt problems. The question is not what deficit you have, but what you use it for. You cannot generate the wrong incentives for reactivation. The debt problems are fundamentally due to the perception of willingness to pay. Expansionary fiscal policy is necessary, but you also have to give confidence to the markets. The exit from confinement has to be staggered, by areas and by sectors. Alicia García Herrero warned that in Spain we should think about a staggered exit. Plans have to be made and known, we have to know what types of activities are going to be opened and in what timeframe in order to prepare for them. We should know the order in which they will be opened. Once we know this, we have to understand that not everything can be saved, so we have to know which sectors are more strategic or relevant. Pedro Antonio Merino said that, if you look at what happened in Hubei and that there is a very important slippage in diagnostic notifications, what you see is that in Spain it is reducing, but the way out is a government decision. Once you manage to handle the hardest part of the crisis, the government will have to choose whether we recover activity more or less quickly, but for that there is also uncertainty, because if the asymptomatic infected continue, there are more of them and they have a viral load for contagion. We need to open up the sectors little by little and measure the number of people who are infected. This is the dynamic that will allow us to recover. The fear is that Spain is a country in terms of GDP that has the highest net international position after the United States. This is bad if there is no European solution to the financing of the economy, or if these European accompanying measures are limited. Manuel Balmaseda expressed his concern about European assistance. The response now is very important, even if it is not optimal. A signal needs to be sent to citizens that Europe matters. If not, we will have a crisis in two years because of Europe's inability to respond to the crisis. Europe is the solution for Spain, but also for Germany. Alicia García Herrero added, in this respect, that what we should really be asking for all of Europe is for the idea that we are all in the EU to be fulfilled. We do not want anything else. The single market, instead of reasserting itself over time, is breaking down. This is not about solidarity, but about respect for European integration, without which we cannot have monetary integration that is not so easy to get out of. This has to lead to a greater sharing of fiscal responsibilities. Pedro Antonio Merino said that this is a shock that should lead to mutualisation. There is not going to be mutualisation because it is not in the countries' obligations to do so, but financing is needed that does not jeopardise long-term sustainability. There should be money from the European Stability Mechanism, with reduced conditionality. There should be more than an inter-state fund. The ECB has taken measures that represent a very important turn of the screw, such as discounting loans with state guarantees, write-offs on those discounts or those bonds. This is in line with the idea that we are not going to leave the euro. If no progress is made on mutualisation, we should have a second best. Spain is the second country that says it does not trust the leadership of its government, so we have a fiscal and financial problem.

The Rafael del Pino Foundation is not responsible for the comments, opinions or statements made by the people who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their sole responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio González, are the result of the debates held at the meeting held for this purpose at the Foundation and are the responsibility of the authors.

The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio J. González, are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.