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Research Dept > Economic information > Monthly Report > Web edition 19-6-13
Monthly Report, num 330 - December 2009
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Encouraging signs for the world economy
Practically all countries have boarded the train to recovery. The publication of growth data for the leading world powers has capitalized the macro-economic data for November. Practically all countries have boarded the train to recovery. There haven't been any huge surprises but it's very welcome after several tough quarters. We don't expect the train to stop from now on, but it might take a while to build up a head of steam. The collateral damage of the recession has been huge, with repercussions that will last longer than we would like.
The United States and the euro area are starting to come out of the worst recession since the Second World War. The United States was one of the first developed countries to announce positive quarter-on-quarter growth. With a rise of 0.7% compared with the previous quarter (a 2.5% drop year-on-year), it has reaffirmed its leading role in the world economy in spite of having gone through the worst recession since the Second World War. Nevertheless, the US economy has been hurt and progress towards higher growth will be slow. Evidence of this is that a large part of the upswing in gross domestic product (GDP) is due to state incentives for vehicle purchase. Take away the effect of economic stimulus measures and there are no real signs of solid growth in private consumption.
The GDP of the euro area increased 0.4% quarter-on-quarter in the third quarter (the year-on-year rate still fell by 4.1%) and everything suggests this rate of growth will have kept up over the last three months. Although the breakdown by component is not yet available, the foreign sector and economic stimulus measures are very likely to have been the mainstays to coming out of this crisis. A process that is benefitting from the push of Germany, France and Italy, which grew between three to seven percentage points with respect to the previous quarter. However, we don't expect the recovery in the euro area as a whole to be very vigorous in the next year either. As from the second half of 2010, consumption and investment will take over from the foreign and public sectors, but they are very unlikely to do so with sufficient determination to take the growth rate much above 1%.
The crisis is leaving a large trail of unemployment in all countries. One of the main elements hindering the recovery capacity both of the United States and the old continent is the significant deterioration in the labour market. This is at its lowest point for several decades in the United States, with more than 7 million jobs having been lost in the crisis and an unemployment rate above 10%. The rise in unemployment has been more moderate in the euro area and the rate does not reach 10%, but the situation would be much worse without the plans for temporary reductions in the workforce and working hours implemented by different countries.
Emerging economies are the driving force. One peculiarity of the global recovery is the push coming from emerging economies, led by China and Brazil. The main indicators for the Asian giant continue to offer spectacular growth rates but, to ensure long-lasting growth, consumption will have to take over as the source of stimulus in the medium term. China is currently taking its first steps in the right direction. Brazil is also filling the headlines: it's creating jobs, its GDP is growing at an annualized rate of close to 5% and the forecasts for 2010 are giving growth rates of over 4%.
The start of the recovery begs the question of how and when the central banks should withdraw the exceptional expansionary measures applied to avoid disaster. At the end of their respective meetings in November, the European Central Bank (ECB) and the Federal Reserve of the United States (Fed) stressed that the conditions of financial markets and of the real economy are continuing to improve, albeit noting that recovery was expected to be slow. Jean-Claude Trichet hinted that, although it's too soon to implement the exit strategy, its time is nigh, interpreted by the markets as a sign that one-year liquidity injections would not be sustained after December 2009. The risk is that, if liquidity is not withdrawn smoothly, short-term interest rates might rise, in turn forcing up all the other monetary rates.
The central banks are starting to discuss when and how to withdraw the exceptional expansionary measures. As far as traditional monetary policy is concerned, both the ECB and the Fed continue to send out the message that official interest rates will remain at their current levels for some time yet. The markets deduce that the ECB might raise the reference rate in the fourth quarter of 2010, and that the Fed might do so throughout the second half of the coming year. Given that the economy's recovery will be very slow, it's difficult to see a rise in interest rates in the first half of next year. On the other hand, if interest rates remain at their current levels for longer, this might encourage excessive risk-taking.
The other focus of attention in the financial markets is exchange rates. The revaluation of the euro against emerging currencies is not in the normal course of events, given the trends in the corresponding economies. But the exchange rate that's causing most controversy is the Chinese currency. The Chinese government's resistance to allowing the exchange rate to fluctuate freely between the renminbi and the dollar seems to be crumbling, as in the last quarterly report on the Chinese central bank's monetary policy, the possibility was mentioned of allowing the renminbi to appreciate further.
The tone of financial markets continues to be favourable in general. Debate regarding what the future action might be of the main monetary authorities and government in China could lead to uncertainty. However, the tone of the financial markets continues to be favourable in general. Evidence of this is that firms are continuing to take advantage of good market conditions to sell bonds at breakneck speed. The volume of new issues has hit record levels, even in high yield sectors, in spite of default ratios in this segment having also risen to record highs since the Great Depression of the last century.
Trends in the main stock market indices, resistant to downgrades of any importance, also reflect the positive tone predominating in the markets. One of the factors that bolstered the stock markets was corporate results. In the case of the S&P 500, 80% of the companies offered pleasant surprises, while in the euro area only 36% of the companies in the Euro Stoxx 50 published higher than expected results. This difference underlines that the upswing in business margins is much faster in the United States.
The GDP of the Spanish economy slows up its decline in the third quarter. Meanwhile, the Spanish economy is still seeing negative growth, although a change in trend can be noted and the slowdown in economic decline in the third quarter was remarkable. GDP fell three percentage points compared with the previous quarter, an improvement of eight percentage points compared with figures for the second quarter. This change can be explained by the improved international situation and the lower deterioration in domestic demand, thanks partly to the monetary and fiscal stimuli put in place.
Domestic demand is still very weak but is very likely to improve. In year-on-year terms, in the third quarter GDP fell by 4.0%, two percentage points less than in the preceding quarter. The downswing in business was due to the fall in domestic demand, dropping 6.5 percentage points, while the foreign sector contributed 2.5 percentage points to growth. Both exports and imports slowed their fall but the improvement in goods transactions was particularly outstanding, resulting from the improved trends in demand, basically from the European Union.
The Spanish economy's capacity to recover over the coming quarters, as the rest of the developed economies, will be hindered by the sharp deterioration in the labour market. According to data from the National Institute of Statistics, in the third quarter the unemployment rate stabilized at 17.9% of the labour force. However, this was due to a reduction in the labour force as jobs continued to be lost, although at a slower pace. The weak demand this generates is reflected in the trends in prices. The year-on-year percentage change for the consumer price index for October was negative for the eighth consecutive month, at a rate of 0.7%. This fall in prices is also reflected in the GDP deflator which, in the third quarter, was down 0.4% compared with the same quarter the previous year. This was the first drop in the GDP deflator for several decades. However, we expect prices to grow again as from November and, in 2010, they will be affected by the rise in value added tax, announced for July.
The Sustainable Economy Act should help to consolidate recovery. Within this context, the confidence indices are still improving and forecasts suggest this will continue in the coming quarters. The Organization for Economic Cooperation and Development predicts a slight drop in GDP in 2010, much lower than forecasted just a few months ago. However, coming out of the recession, which will happen in the first half of next year, will hardly relieve the current deterioration in the job market. The need to provide business with another vigorous push to encourage a new expansionary cycle is behind the presentation, at the end of November, of the Sustainable Economy Act. The aim is to consolidate and appropriately guide trends in the economy over the coming years and, to this end, the government has drawn up an extensive, complex legal text that covers a wide range of regulatory changes. Its objective is to improve the regulatory framework, boost the competitiveness of the economy and push forward with environmental sustainability. Although its results will only be visible in the medium term, a large part of this plan's success depends on the capacity to climb aboard the train to recovery and on this train keeping up a good cruising speed.
27 November, 2009

Chronology

CHRONOLOGY

2008

October 7 Spanish government announces creation of fund for purchase of financial assets of financial institutions up to maximum of 50 billion euros and raises guarantee on deposits and investments to 100,000 euros.
  8 European Central Bank, Federal Reserve and Bank of England cut official interest rates by 50 basis points in joint move with other central banks.
  12 Euro area countries agree on joint action to strengthen financial system up to end of 2009.
  13 Government authorizes granting of government guarantees up to 100 billion euros in 2008 on new financial transactions of financial institutions with possible extension to 2009.
  28 Ibex 35 index for Spanish stock exchange marks up lowest level (7,905.4) since 2004.
  29 Federal Reserve cuts reference rate to 1.00%.
November 6 European Central Bank lowers official interest rate to 3.25%.
  15 Meeting of G-20 in Washington to reform international financial system.
  20 Dow Jones index for New York stock exchange records lowest level since 2003 (7,552.3).
  28 Government announces 8 billion-euro public works plan for municipalities and 3 billion-euro plan for investment in various sectors and economic spheres.
December 4 European Central Bank lowers official interest rate to 2.50%.
  16 Federal Reserve reduces reference rate to band between 0%-0.25%.
  24 Brent quality oil price drops to lowest level since July 2004 (37.23 dollars a barrel).

2009

January 1 Further enlargement of euro area with entry of Slovakia making total of 16 member states.
  15 European Central Bank lowers official interest rate to 2.00%.
  20 Barack Obama sworn in as President of the United States.
March 5 European Central Bank lowers official interest rate to 1.50%.
  6 Central government announces measures to facilitate financing of working capital for medium-sized companies and to revive employment and ease effects of unemployment.
  27 Government approves series of measures to boost economic activity: reform of law on meetings of creditors, revival of credit insurance and introduction of EU directive on services.
April 2 European Central Bank lowers official interest rate to 1.25%.
G-20 meeting in London aimed at reform of international financial system.
May 7 European Central Bank lowers official interest rate to 1.00% and announces measures to facilitate liquidity in banking system.
  12 Government announces new economic policy measures: partial removal of tax deduction for buying normal residence as of 2011, aids for buying cars, reduced taxes for some small and medium-size businesses and self-employed persons, etc.
June 12 Government increases taxes on tobacco, petrol and diesel fuel for motor vehicles.
  26 Government establishes Fund for Orderly Restructuring of Banks.
September 26 The Spanish government passes the 2010 State General Budget, which eliminates the deduction of 400 euros from income tax, raises the duty on capital income and also the general and low VAT rates as from July 2010.
November 27 The government presents the bill for the Sustainable Economy Act

Agenda

AGENDA


December

2 Registrations with Social Security and registered unemployment (November).
3 Governing Council Central European Bank.
4 Industrial production index (October).
15 CPI (November).
Fed Open Market Committee.
16 EU HCPI (November).
Labor cost survey (third quarter).
22 International trade (October).
Central government revenue and spending (November).
23 Producer prices (November).
30 Balance of payments (October).

January

5 HCPI flash estimate (December).
8 Industrial production index (November).
14 CPI (December).
Governing Council Central European Bank.
25 Producer prices (December).
26 Fed Open Market Committee.
28 HCPI flash estimate (January).
29 Labour Force Survey (fourth quarter).
30 Balance of payments (November).




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