Geopolitics and interest rates: keys to the global economy

This forum, held in Madrid, attended by Ludovic Subran, Chief Economist of Allianz, highlighted Spain’s positive performance relative to other EU nations. The country’s positive outlook is bolstered by temporary strengths such as the European Next Generation funds, the robustness of its financial system, and the diversified Spanish industrial sector, particularly poised for an impending energy revolution.

Spain “appears resilient amidst the pronounced slowdown affecting neighboring countries,” said Gonzalo de Cadenas-Santiago, forecasting near 2% growth with inflation maintained around 3%. Spanish companies also generally maintain sound financial positions, with margins, though impacted by rising costs, showing more resilience compared to peers in Europe. While there is currently no significant rise in default risks or delinquency, the upcoming challenge for 2025 will be the refinancing needs of companies.

Among the many issues impacting the economy, geopolitics and governance stand out prominently. Ongoing conflicts in recent months and years, with no foreseeable resolution in the near term, coupled with the U.S. presidential elections, exacerbate uncertainty about economic trends and introduce instability into the global geopolitical and economic landscape, particularly in trade.

Experts from MAPFRE Economics and Allianz also concur on the need to move towards monetary policy normalization. Inflation needs to be kept in check due to its implications for businesses and its social impact, especially affecting vulnerable families. Nevertheless, with signs of inflation normalization, interest rate cuts seem imminent, with the ECB expected to take the lead (in June) ahead of the Federal Reserve (in September, economists suggest). “We're not anticipating a return to persistent inflation, despite elevated levels. We anticipate rate reductions in June,” remarked Gonzalo de Cadenas-Santiago.

For Europe specifically, analysts highlight the challenge of economic growth disparities with both the United States and the broader European continent, facing a 30% disadvantage. Factors contributing to this gap include superior fiscal and budgetary policies in the U.S., alongside more effective investment management. Weaknesses in the European financial system, lack of positive energy balance, and the imperative to address competitiveness issues in European industries and companies are also evident.

Additionally, fighting climate change ranks among the top priorities for analysts this year. The rise of climate change denialism obstructs progress towards a greener economy, as it proposes refraining from continuing along this line to avoid “meddling in household and individual decisions.”

Emerging markets have also shown robust resilience over the past four years. Despite the massive injections of money into the global system in 2020, these countries, including Brazil, managed their monetary policy effectively, contrasting with previous crises. They maintained orderly fiscal policies, contributing to their stable performance.

Latin America, in particular, has demonstrated noteworthy resilience. Over the last two years, the region has pleasantly surprised with modest yet cyclically positive growth. Minimal nominal and exchange rate volatility alongside significant financial inflows have characterized its economic landscape. Moving forward, the region’s primary challenge lies in enhancing productivity and ensuring sustained long-term growth, especially for nations grappling with debt restructuring needs.

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