2018: things are not looking so bad. The aggregate macroeconomic data paint a picture of a broadly positive 2018, in line with the forecasts made at the end of last year, and everything suggests that global growth will stand at around 3.7% for the year as a whole (only 1 decimal point lower than we expected in December 2017). Thus, despite the fact that there are now more sources of risk, for the time being global macroeconomic health has shown remarkable resilience. The outlook for 2019 has also remained virtually unchanged: we now expect growth of 3.6%, only 1 decimal point below the forecast of a year ago. By country, however, there have been some notable surprises, both positive and negative. Taking the positive surprises first, the North American economy has performed better than expected, with growth that will probably end up being 0.4 pps higher than predicted a year ago. In any case, it is important to emphasise that this is largely due to the fiscal boost implemented by the Trump Administration, rather than structural factors. In contrast, the euro area has been the main negative surprise given that, in all likelihood, growth for 2018 will prove to be lower than expected a year ago. Nevertheless, the shortfall in question is no debacle: the major negative surprise occurred in the growth figures for Q3 (just 0.2% quarter-on-quarter), but this has been mainly due to temporary factors. The outlook for 2019, on the other hand, remains positive and reasonably similar to what we expected a year ago.

Protectionist risks remain significant. The US midterm elections did not deliver any major blow to Trump (the loss of the House of Representatives serves as a warning, but the Republican Party retained its majority in the Senate). Therefore, this electoral process is not expected to lead the US Administration to substantially change its position regarding its trade policy. As a result, the trade tensions between the US and China are likely to remain high over the coming months. Nevertheless, a window of opportunity has opened up that could lead to a certain cooling of tensions: the discussions between high-level trade representatives from China and the US that took place in November were a positive step, and the possibility of a trade truce being reached at the G-20 summit in Buenos Aires in early December is now more tangible, following the meeting between Trump and Xi Jinping.

The preliminary Brexit agreement is reached, but its approval lies in the balance. Specifically, London and Brussels have reached a preliminary agreement on the United Kingdom’s departure from the EU. This agreement allows the transition period to be extended beyond 2020 and establishes that the United Kingdom will remain in a customs union with the EU if no agreement is reached on the future economic relationship between the two parties during the transition period. The latter is a particularly positive element since it means that, if no agreement is reached during that period, the instability would be mitigated by the fact that the United Kingdom would remain in a customs union with the EU by default. Now the two parliaments must approve the preliminary agreement, which may prove difficult in the case of the United Kingdom due to the fierce opposition of the Eurosceptic wing of the Conservative Party and the Labour leader’s decision to oppose the agreement. The outcome will be known on 11 December when this important vote, which is expected to be tight, is due to take place in Westminster.

In the euro area, the latest indicators suggest a moderate growth rate at the beginning of Q4. Specifically, the composite PMI index for the whole of the euro area, which measures business sentiment, fell to 52.4 points in November, 5 decimal points below the figure for October and the lowest since December 2014. This, together with a somewhat disappointing GDP in Q3 (0.2% quarter-on-quarter growth), has led us to slightly reduce our forecasts for 2018 (1.9%) and 2019 (1.8%). This environment of growth rates that are more moderate, albeit nonetheless healthy, was also reflected in the European Commission’s new growth forecasts. In the autumn update of its economic scenario, the Commission revised its forecast for 2019 down (by –0.1 pp) to 1.9% (1 percentage point higher than our forecast), due to the slower growth expected in the external sector. However, it also noted that the growth of the euro area will continue to rest on the improvements in the labour market and on accommodative financial conditions. With regards to Germany, the disappointing GDP figure for Q3 (–0.2% quarter-on-quarter) confirmed the omens of a temporary slowdown in that quarter due to a negative contribution of net exports and lower car production levels (associated with the new emissions regulations that came into force on 1 September).

Tensions between Italy and the European Commission remain the order of the day. After analysing the Italian Government’s new draft budget for 2019, the Commission determined that Italy is not complying with the EU’s fiscal rules, since it is not reducing its public debt to GDP ratio at the speed that is required. As a result, it decided to kick-start the process for the European Council to implement an excessive deficit procedure against Italy. This procedure would involve a more comprehensive monitoring of the EU’s recommendations on fiscal matters, and it could lead to fines of up to 0.5% of GDP being imposed. Nevertheless, this is a long procedure and the tensions and disagreements between the two parties are likely to persist over the coming months.

Portugal: solid growth

The economy tempers its growth in the second half of the year. EIn Q3 2018, GDP growth slowed to 0.3% quarter-on-quarter and 2.1% year-on-year (0.6% and 2.4% in Q2 2018, respectively) and was heavily supported by domestic demand (which contributed +2.4 pps to growth). By component, growth in private consumption slowed to 2.3% year-on-year (2.7% in Q2), while investment performed particularly well with a growth of 4.5% (4.1% in Q2). On the other hand, the contribution of external demand remained negative (–0.3 pps) in a quarter in which imports (+3.5%) continued to outstrip exports (+3.1%), although both slowed down compared to Q2. With regards to Q4 2018, the available indicators suggest that the economy is growing at a solid pace, backed by domestic demand and with a slightly negative contribution from the external sector. In particular, both the economic sentiment indicator calculated by the European Commission and the Bank of Portugal’s coincident indicator remain close to their historic highs and point towards a GDP growth of around 2%.

Encouraging developments in the labour market. Employment grew by 2.1% year-on-year in Q3 2018, reflecting a good rate of growth, albeit somewhat lower than that of the previous quarter (2.4%). By sector, services were the main driver of job creation (+68,600 people compared to Q3 2017). The activities associated with the public sector also stood out, accounting for more than half of the jobs created in Q3 2018, as did employment in the construction sector, which is beginning to show signs of more buoyancy. The number of people in unemployment, meanwhile, decreased by 20.6% in year-on-year terms in Q3 2018, and the unemployment rate stood at 6.7%. This sets an encouraging trend that will provide continuity to the recovery in the labour market over the coming quarters.

Inflation remains contained. In November, headline inflation (measured by the non-harmonised CPI) slowed to 0.9% year-on-year (1.0% in October). This was due to the tempered growth in energy prices (4.9% in November, versus 7.3% in October) and in spite of the rise in the prices of unprocessed food (0.7% in November, following a –0.1% decline in October). Core inflation, on the other hand, remained at moderate levels (0.6%), despite increasing by 0.1 pp since October. Finally, inflation as measured by the harmonised index of consumer prices (which incorporates information relating to the consumption of tourists) rose to 1.0% (0.8% in October).

The current account remains slightly in the red. According to the cumulative figures for the past 12 months, the current account balance was once again in the red in September (–389 million euros, representing –0.2% of GDP) and remained at levels relatively similar to August. Compared to the previous month, September produced a slight increase in the balance of services (8.3% of GDP), favoured by the contribution of both tourism (5.9% of GDP) and all other services (2.4%), in addition to a decrease in the deficit in the balance of goods. On the other hand, the balance of non-energy goods, which is largely responsible for the deterioration in the current account in recent months, remained at –4.3% of GDP. The deficit in the balance of energy products, meanwhile, avoided any deterioration and stood at –2.4% of GDP. Lastly, with regards to the income balance, in September the deficit rose to 1.7% of GDP (–1.6% in August), continuing the deteriorating trend of recent months.

The public accounts continue to show improvement. The data available up to October show that the consolidated general government balance registered a surplus of 0.2% of GDP. This represents a substantial improvement compared to the same period in 2017 (when it stood at –1.1%). This favourable trend partly reflects the current dynamism of economic activity, which continues to push revenues above expenditure. In particular, revenues registered a cumulative growth of 5.4% up to October, backed by strong momentum in both tax and contributory revenues, while expenditure increased by 2.1%. Nevertheless, it should be noted that the lower growth in expenditure has been affected by staff costs, and in particular by a change in how the extra Christmas wage payment is paid to civil servants and pensioners. Specifically, this year it was paid out entirely in November and December (whereas in 2017, half of this payment was paid in 12 parts spread throughout the year, and only the other half was concentrated in November/December). After correcting for this factor, the increase in staff costs comes to 2.5% up to October (versus the observed reduction of –1.2%). As such, the trends noted to date reinforce our view that 2018 will end with a fiscal deficit of –0.7% of GDP (also in line with the Government’s projections).

New bank lending shows solid growth. With data up to September, new bank lending for the purchase of housing grew by 24.3% (cumulative figure for the year to date), while new bank lending in the form of consumer loans rose by 14.1%. Despite this firm growth, in both segments there was a slight moderation in new bank lending compared to August (when the figures stood at 26.4% and 15.6%, respectively). This reflects the macroprudential measures implemented by the Bank of Portugal since July. Finally, new bank lending to companies showed stable growth of slightly over 13% year-on-year.