World economic growth in 2019 slowed markedly, confirming the weakness that had emerged in the 2nd Half of 2018. The trade tensions between the United States and China, the tumultuous geo-political environment and the persistent uncertainty linked to the Brexit negotiations curbed consumption and investment. These factors were compounded by the slow pace of growth in China, which has stabilized at around 6%, its lowest level in the last 30 years.
The United States continued its long expansion, displaying resilient domestic demand and a job market with unemployment at historic lows (3.6%), as well as continuing real wage growth of 3%. However, the restrictive monetary policy implemented by the Fed has adversely affected some sectors of the economy, such as real estate, which has experienced a sharp drop. In addition, manufacturing was hit hard by the US-China trade war.
Growth was modest in the euro area, averaging 0.2% on a quarterly basis.
The weakness is mainly attributable to the decline in exports and the crisis in the auto sector, which has been particularly significant for Germany. Domestic demand in France and Spain has been resilient, while economic activity has stagnated in Germany and Italy.
In Latin America, economic conditions were weak and varied, affected by strong political instability. The deterioration in the global context, the slowdown in the Chinese economy and the decline in commodity prices had a major impact on the entire area.
Argentina is in recession and the uncertainty generated by the new economic policies adopted by the Fernandez government created concern about debt stability and the prospects for recovery. GDP contracted by 2.1% in 2019 and is expected to fall again in 2020.
The Chilean economy was shaken by the social uprisings last October, which led to a sharp contraction in the real economy towards the end of the year, penalizing the currency and slowing economic activity. Both the central bank and the government intervened actively with a very accommodative monetary and fiscal policy, which should allow the economy to normalize over the course of 2020.
In Brazil, economic activity was weak in the first part of 2019 due to the difficulties registered in industry and services, while private consumption remained fairly resilient. Indicators for the real economy have reversed course, however, showing a strong recovery in the last two quarters. The approval of pension reform has restored the confidence of firms and consumers and paved the way for the start of a new cycle of reforms in 2020.
In Colombia, economic activity outperformed the entire area, driven by private consumption and investment, despite the escalation of social unrest towards the end of the year. In Peru, expansionary financial conditions sustained domestic demand; however, the shock in the primary sector in the first part of the year impacted the economic recovery.
The outbreak of the COVID-19 epidemic in China and the subsequent spread of new infections in other parts of the world since the start of the year have radically altered the scenario for 2020. At this point, a strong global shock is expected both on the supply side (i.e. interruptions of the supply chain and production activities) and on the demand side (lower discretionary consumption and investment due to the restrictions). Among the mature economies, the euro area is the most at risk, given the weight of manufacturing, discretionary consumption and exports in its economy and the strong links with China in the supply chain. By virtue of the restrictive measures adopted in many countries in the euro area, the probability that it will enter a recession in the 3rd Quarter of 2020 is now becoming high. Italy is already in recession from the 1st Quarter of 2020 and any further restrictions imposed by the Government threaten to erode the economic outlook for the current year even further. Following the imposition of new restrictions, Spain will also be sharply impacted, not only in the services sector (e.g. tourism) and discretionary consumption but above all in manufacturing and other industry. Owing to the weakness of their healthcare systems and the limited scope to introduce expansionary fiscal measures to support demand (as well as their large debt exposure denominated in foreign currencies), the emerging economies are now highly vulnerable.
At this juncture, the response of the central banks was rapid and coordinated. The Fed aggressively cut interest rates (in two extraordinary sessions), bringing them to their neutral value (from 1.50-1.75% to 0-0.25%). The Bank of England lowered its official interest rate to 0.10% from 0.75%. The response of the ECB was focused entirely on the problem of liquidity: it therefore did not cut rates but did introduce a massive monetary stimulus. First, it expanded its quantitative easing program by €120 billion until the end of 2020, greater than expected, while at the same time more favorable conditions were granted for banks’ long-term refinancing operations. A €750 billion Pandemic Emergency Purchase Program was also created, easing the constraints of the previous quantitative easing program and thus allowing the ECB to purchase more Italian public debt securities.
Governments around the world are also introducing major fiscal stimulus measures to counter the economic consequences of restrictions imposed to combat the coronavirus pandemic. The support of the European Commission and the possibility of derogating from the constraints of the Stability Pact will allow the Italian government and those of other European countries to implement the necessary measures to promote economic recovery in the 2nd Half of the year.
In the coming months, a clearer picture of the economic consequences of the epidemic and the impact on the financial markets will certainly emerge.
GDP growth (%)
Source: National statistical institutes and Enel based on data from ISTAT, INE, EUROSTAT, IMF, OECD and Global Insight.
Average exchange rates
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us Dollar/chilean Peso
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The IBOR reform
Interbank Offered Rates (IBORs) represent benchmarks for most financial instruments marketed worldwide.
Over the years there have been several cases of manipulation of these rates by banks, and for this reason regulators around the world have begun a reform of the IBORs to restore the reliability and soundness of these benchmarks.
In view of the considerable uncertainty surrounding the timing of the reform in the transition phase, the Enel Group has launched an assessment of the impacts on the financial instruments subject to revision as well as on the organizational structures involved.
Note that management is aware of the associated risks and for this reason these activities have been planned so as to complete the transition by the deadline set for 2021.