Research Dept. News
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Monthly Report, num 299 - February 2007
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Overall summary - 2007 starts off on good footing
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Moderate temperatures work in favour of energy savings and construction...
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Global warming, change of course in the Niño or statistical anomaly? The fact is that in November, December and the first two weeks in January the temperature was exceptionally mild in most developed countries of the northern hemisphere. And this has worked well for the economy. The clearest effect of the meteorological windfall this winter may be noted in heating costs. This largely explains the drop in oil prices in recent weeks. Another sector benefiting from the weather is construction. Here winter activity normally drops heavily but under current conditions it has recovered and is helping job creation. The mild temperatures may also boost consumer buying although this effect is more cause for discussion.
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...in year when world economic growth prospects start off very well.
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In some way or another, climatic factors have served to improve economic prospects at the start-up of 2007. And prospects were already quite good. In mid-January, Rodrigo de Rato, director of the International Monetary Fund, stated that he expected robust world growth in 2007 of around a rate of 5%, which meant very substantial growth and one of the longest such periods since the end of World War II.
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Indicators for economic activity have been especially favourable. A decisive factor in this regard was the drop in oil prices to close to 50 dollars a barrel (Brent) whereas as the end of last year it was still running at around 60-65 dollars. It should be pointed out that in the final days of January the price of crude tended to recover slightly. Apart from weather factors, it is believed that other aspects had had an influence on this notable cut. These may have included some readjustment of supply capacity, the possible withdrawal of speculative money and even the perception of lower geo-strategic risk.
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Real estate recession in United States may have hit bottom.
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In the United States, the main uncertainty is still the extent of the real estate recession and any possible shift to the rest of the economy. Most recent figures suggest that the real estate downturn may have slowed but we cannot discount a relapse. On the supply side, economic activity and employment in construction will have benefited from the mild weather conditions at the start of winter. With regard to inflation, the drop in energy prices represents a relief although it does not affect the possible background pressures that may still exist. On the demand side, lower outlays for petrol (gasoline) and heating mean greater household purchasing power, a key factor when it comes to whether or not there comes about a shift arising from the drop in real estate.
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In the meantime, the Federal Reserve is debating whether or not to lower interest rates in order to contain the real estate risk or raise them because of a possible inflation risk or to maintain them steady while waiting to clarify its ideas. This is a dilemma which also involves the markets that at this moment are unable to pronounce a unanimous verdict on the immediate course of the US economy. Nevertheless, this dilemma has helped the dollar which at the end of 2006 dropped in expectation of a cut in Fed interest rates whereas so far this year the euro has dipped against the dollar.
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China’s growth holding at around 10%, a dynamic spreading throughout region, including Japan.
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In China, the other big growth engine of the world economy, things look clearer. According to the statistics office, the gross domestic product grew by 10.4% year-to-year in the fourth quarter, a figure higher than expected. As a result, total growth for 2006 stood at 10.7%, the highest rate in 11 years. This meant it was maintaining the two-digit growth rates that are allowing the Chinese economy to come close to the volume represented by Germany. Thanks to this situation, the Asian region is holding to an enviable economic strength which is also benefiting the Japanese economy whose growth depends largely on foreign demand. On the other hand, Japan’s domestic demand is still failing to take off so that the risk of deflation has not entirely disappeared. At the same time, the Bank of Japan is still resisting any move to normalize its atypically low interest rates.
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In Europe, indicators confirm good state of economic activity with Germany recovering leadership role.
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Economic results in Europe are also consolidating the improvement in prospects. For example, in the Euro Area retail sales and improved consumer confidence, along with the improvement in the labour market, makes it possible to expect that household spending will finally make an active contribution to the current recovery. On the supply side, industrial production is getting a positive boost from export markets. In geographical terms, Germany is showing its best growth since 2000 and has managed to meet the requirements of the Stability and Growth Pact (government deficit below 3% of GDP) for the first time since 2001. In France, the economy is not a major issue in view of the coming presidential elections but available indicators seem to be recovering from the recent dip, an improvement linked to the increased dynamic in the labour market. On the other hand, the Italian economy may have lost some of the drive it was showing up to the third quarter of last year.
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ECB continues to indicate interest rate rises despite good results on inflation.
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In this context of dynamic growth, inflation in the Euro Area has turned out lower than forecast. The positive effect of energy prices has counteracted a possible growth in consumer demand with the result that the harmonized index of consumer prices in the Euro Area ended 2006 at 1.9%, just below the limit desired by the European Central Bank (ECB). At the same time, underlying inflation stood at only 1.6% year-to-year. The ECB, however, has been little impressed by the moderation in prices. The growth of the money supply reference followed by ECB economists has shot up in recent months going close to 10%. Although the link with inflation is unclear, to say the least, the monetarist tradition of Frankfurt obliges it to stay on the alert. The markets are anticipating an early upward move by the ECB at the Governing Council meeting in March which could put the interest rate at 3.75%.
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The Bank of England surprised everyone in January with an unexpected increase in its reference rates in view of the suspicion (shortly after confirmed) that inflation would go up to the limit of the range set by the bank as its monetary policy objective. Indicators for the British economy confirm a new drive in private consumption and progress in industry and services.
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