ECB’s de Cos Sees Downside Risks for Global, Euro-Area Growth

(Bloomberg) -- European Central Bank policy maker Pablo Hernandez de Cos said the global economy is facing significant risks and inflation in the euro area could remain low for some time.

Hernandez de Cos, governor of the Bank of Spain, listed threats including an increase in protectionist measures, vulnerabilities in China and other emerging markets, and elevated debt levels. Europe faces additional issues including Brexit, an aging population, low productivity, and the weakness of “certain banking entities,” without identifying any institutions.

“Confronting the challenges facing the European economy requires decisive action by national authorities to boost growth potential and reduce weaknesses,” Hernandez de Cos wrote in the Bank of Spain’s annual report on Tuesday.

He also noted how wage increases across the euro area and elsewhere could continue to be absorbed by companies, rather than lead to price increases. This reduces corporate profit margins, but could also mean inflation remaining lower than expected for longer.

Recently in the EU and other areas, “there has been an increase in salaries that, for the time being, hasn’t translated to prices,” Hernandez de Cos wrote. “Going forward, it’s unknown to what extent that transmission will take place or if, on the contrary, the impact of higher labor costs will tend to be absorbed, as in recent quarters, via a compression of companies’ margins.”

Hernandez de Cos specifically called on Spanish leaders to take advantage of the economy’s robust growth rate to address the high structural deficit and debt, and the “dysfunction” in the labor market, including a high percentage of temporary workers.

He also warned that some of the elements boosting the economy aren’t sustainable in the long run, including the Socialist government’s expansive fiscal policy and a decrease in Spaniards’ saving rates to a historic low. The Bank of Spain expects the economy to grow by 2.2% this year after expanding 2.6% last year.

To contact the reporter on this story: Jeannette Neumann in Madrid at jneumann25@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Catherine Bosley

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