Research Dept. News
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Monthly Report, num 339 - October 2010
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Executive summary
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Recovery at different speeds
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The disparity in the speed of recovery between different countries has grown.
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As the year goes on, two distinctive traits can be seen in the atypical recovery phase of the economic cycle we're currently going through. First, the variability or volatility of macroeconomic indicators has increased, with periods when activity seems to be gaining strength alternating with others when it weakens, even with the threat of a double-dip recession. Second, geographical disparities have become more severe.
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We can differentiate two broad groups of countries within this complex situation. The first is made up of those in an already consolidated expansionary phase, seeing incipient inflationary pressures and therefore already starting to restrict their monetary policy. The second group contains those economies with uncertain economic growth and low inflation rates and, for this reason, they are maintaining and even accentuating a highly lax monetary policy. The main exponents of the second group are the large developed countries and their central banks.
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Growth prospects for developed countries are more modest...
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As regards the United States, its economy is en route to a moderate recovery. For 2010 as a whole we therefore expect 2.8% growth that's mostly due to the boost from the first quarter. However, the economy slowed down considerably in the second quarter, going from 0.9% to 0.4% growth quarter-on-quarter. The main cause of this lethargy in activity lies in the problems affecting private consumption, for which we don't expect growth of above 2.0% before the end of 2011. Consumption is gripped by three key factors: household debt, the weak housing market and an adverse labour market. Three factors that are interrelated and will probably mean that low growth will continue to be the main concern throughout 2011, a year for which we expect tepid growth of 2.2%.
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These expectations of sluggish growth have led the Fed to reinvest funds from Treasury stock maturities and thereby stop their balance sheet from decreasing naturally. At its last meeting, the institution made it clear that it was concerned about inflation being below «levels consistent with» promoting price stability and full employment. With this message, the monetary authority opens the door to new measures of monetary stimulus being adopted.
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...leading to the possibility of new extraordinary monetary policy measures being taken.
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The panorama seems to be much clearer in the euro area after the second quarter's figures but caution means that any celebrations must be put on hold. Growth in gross domestic product (GDP) achieved a surprisingly high rate in the second quarter, boosted by domestic demand, both in terms of investment and private consumption. So is the recovery more mature than most analysts believed? It's possible, but the bulk of the evidence suggests that this strong pace of growth won't continue in the second half of the year, with leading indicators for consumption and investment pointing to more moderate growth. The trend will be somewhat more positive in the coming year but still weak overall.
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Meanwhile, the main emerging economies continue to grow at a good pace...
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The response of the European Central Bank (ECB) has been clear: maintain its exceptional measures to support credit and ensure liquidity. However, unlike the Fed, the ECB has attempted to stress that, once it sees the markets truly getting back to normal, it will start to withdraw the special facilities.
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The outlook for the economy of the land of the rising sun isn't very encouraging either. In the first half of 2010, Japan benefited from the recovery in world trade and from fiscal stimuli for consumption, leading to a growth forecast for the whole of 2010 of close to 2.8%. However, weak domestic demand and the continuing deflationary situation that, according to the Bank of Japan, will go on until early 2012, mean that our forecast for 2011 as a whole is much more cautious, namely growth of around 1.4%. In fact, the Japanese Tax Ministry, protected by the economy's deflation, has decided to intervene directly in the currency market to slow up the yen's appreciation and thereby not harm the export sector any further, the central pillar to Japanese growth. This situation might pressurize the central bank to increase its monetary expansion by extending its credit programme or even by buying up assets.
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...forcing them to adopt restrictive economic policies.
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At the opposite end of the scale we find the main emerging countries, which have already started a more restrictive economic policy to stop the motors of their economy from overheating. The Chinese economy, for example, continues to advance firmly, demonstrating its resistance to the crisis. With growth prospects of around 9%-10% in 2010 and 2011, the Asian giant is far from any kind of standstill. This resistance, however, does not mean that the country's structural weaknesses have disappeared. Growth still depends too much on the foreign sector and investment. The Chinese authorities have already set up numerous measures this year aimed at resolving this investment-foreign sector bias. Among other measures, of note are its relaxation of exchange rate controls, leading to a slight appreciation in the renminbi, and limitations to granting credit.
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Brazil also continues to provide spectacular figures. In the second quarter, it once again exceeded all expectations with a year-on-year growth of 8.7%. The consequent increase in inflationary pressures has meant that Brazil's central bank has started a series of hikes in the reference interest rate, 200 basis points for the year so far.
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Government bonds reflect the revised potential growth figures for advanced economies.
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Within this context of revising potential growth figures, particularly for advanced countries, government bond markets have witnessed significant rises in value with the consequent fall in yields. Interest rates in the long tranches (10 years) reached record minimums of 2.1% in Germany, while in the United States they fell below 2.5% and in Japan they broke the psychological lower barrier of 1%, now standing at around 0.9%. This situation has been accompanied by an upswing in volatility, perhaps a symptom of the nervousness that these levels (which are so unusual) generate among many investors. Various factors lie behind these trends in interest rate curves for public debt. But the fears of a slowdown in the US economy and the Federal Reserve's decision to support economic recovery, if necessary, with new monetary policy measures of a quantitatively expansionary nature have been crucial both for the different countries of the euro area and for the United States.
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The Spanish economy is progressing somewhat more slowly.
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With regard to the Spanish economy, its recovery has a similar profile to that of the group of advanced countries although its progress is slower and there is somewhat greater uncertainty regarding the outlook for the second half of the year. In this respect, the national accounts data for the second quarter confirmed a slight acceleration in economic growth in spite of the withdrawal of fiscal stimuli, boosted by some temporary factors. GDP therefore grew by 0.2% compared with the first quarter, one tenth of a percentage point more than three months earlier. GDP almost stabilized in volume compared with a year earlier and posted a -0.1% year-on-year change.
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Of note was the dynamic household consumption and capital goods investment, up on the second quarter of 2009 and leaving behind seven quarters of year-on-year falls. Domestic demand's negative contribution to growth therefore decreased by 2.3 points to -0.5 points. However, a decisive role was played by purchases being brought forward because of the hike in value added tax (VAT) as from 1 July. Expenditure on consumer durables therefore rose more than 13% compared with the second quarter of 2009.
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The dynamism in household consumption loses steam in the third quarter.
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This rise in spending is likely to reverse in the third quarter and indicators already available for this period are showing the corresponding relapse. Retail sales, for example, fell back by 2.3% in August compared with twelve months before and new vehicle registrations fell by 24.0% year-on-year in July-August, once the Plan 2000E funds had been used up that provided direct subsidies for purchases, dropping to the lowest level for the month of August in the last few decades. These indicators of trends in private consumption, combined with those for investment and pending the data on foreign trade, suggest that GDP growth in the third quarter might be slightly negative. Nonetheless, we have slightly upgraded our GDP growth forecasts for the whole of 2010 to -0.3%, mainly due to the inclusion of changes in the series to demand components, introduced by the National Institute of Statistics.
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The main indicators for the labour market also reveal the slow exit from the recession. The total number of workers registered with Social Security totalled 17.7 million in August, keeping the year-on-year fall at the same level as in July, namely 1.6%. Trends in prices are also significant. The hike in the general and reduced VAT rate has only partly been passed on to the end price. We estimate that, of the approximately 1.2 percentage points of its theoretical impact, only half will have had any final effect, the rest being absorbed via manufacturers' or distributors' business margins, given the context of weak consumption.
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Fiscal consolidation measures start to provide results.
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In short, the road to getting the economy back on its feet is not an easy one and there are many risks still threatening the main developed economies. In Spain, one of the sources of tension arising just a few months ago seems to have been controlled, thanks to the decisive budget consolidation measures adopted last year and this, and which will also be present in 2011, going by the General State Budget presented recently. Moreover, the fall in public deficit that has become evident in the first eight months of 2010 has played a key part in international government bond markets differentiating Spain from the rest of the countries on the periphery of the euro area which, like Ireland or Portugal, are once again suffering from harsh attacks due to the sovereign debt crisis.
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09/29/10
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Chronology
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Agenda
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