Research Dept. News
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Monthly Report, num 338 - September 2010
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Executive summary
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The euro area firms up its recovery but the United States weakens
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The growth of the euro area comes as a pleasant surprise after a first half of the year hit by financial storms and austerity plans.
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The first half of 2010 was marked by the consolidation of the international recovery and the flaring up of new financial storms, this time caused by the sovereign debt crisis. The United States, on the part of advanced countries, and China, on the side of emerging economies, seemed to take the lead and guarantee a definitive exit from recession. Europe, however, was immersed in uncertainty created by the high public deficits of some economies, the doubts regarding the capacity of some governments in the euro area to meet their debt payments, the withdrawal of fiscal stimulus plans and fears that the single currency would not be able to withstand the stress.
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The fiercest flames of the euro area's debt crisis had only just been extinguished (thanks to the response of authorities and especially to the publication of the banks' stress tests) when the euro area provided us with a very pleasant surprise. In mid-August the growth data were published for the second quarter of 2010, in which the old continent's economy had progressed by a resounding and unexpected 1.0% compared with the previous quarter, placing the year-on-year rate of change for gross domestic product (GDP) at 1.7%. There have now been four consecutive quarters of growth and, what's more, after the sharp rise recorded, the trend is now clearly positive.
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Germany drives the euro area and growth forecasts increase.
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This burgeoning of the euro area has been particularly thanks to the surprising improvement in the German economy, posting a 2.2% rise quarter-on-quarter, the best figures since the country's reunification. Because of this upswing, the Bundesbank has upgraded its growth forecast for 2010 by more than one percentage point, setting it at 3.0%. These good growth figures have also been accompanied by a significant and no less surprising rise in investment, suggesting that the path taken by the recovery is firm and that the German economy might well have regained all the ground lost during the crisis by 2011.
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The rest of the economies in the euro area presented no surprises, however. Growth in France and Italy was 0.6% and 0.4% respectively and, at the tail end of the recovery, were Spain and Portugal, both growing by 0.2%, and above all Greece, which posted a fall of 1.5% and is the only country still in recession.
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In contrast with the euro area, figures are disappointing from the United States and China and doubts appear as to whether growth can be sustained...
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In contrast to the results of the euro area, the signs of a slowdown appearing in the United States and China have cooled off the favourable expectations produced in the first half of the year. Up to a point, analysts already expected the pace of growth to ease back, both in the case of the United States, due to the gradual disappearance of the fiscal impulse and other temporary factors, and in China, given that, months ago, the government adopted a series of restrictive measures to avoid overheating.
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...although China continues to grow significantly.
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In the case of the United States, second quarter GDP grew by 0.6% quarter-on-quarter. This change in tone of the economy's perceived capacity to recover is mostly due to three factors. Firstly, the downgrading of GDP for the previous quarters, placing the starting point for the recovery lower than had been believed. Secondly, one of the components downgraded the most is private consumption, a bastion of the US economy. Moreover, most monthly indicators show that the slowdown occurring in the third quarter is quite acute. All this means that the fear of a recessionary and deflationary situation in the American economy has reappeared, although this is still deemed very unlikely.
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Indicators for the Chinese economy also reveal a certain deceleration, with the Asian giant's GDP growing by 10.3% year-on-year in the second quarter. The pace of growth is still solid, it's true, but it's 1.6 percentage points less than the figure recorded in the first quarter. Moreover, as in the US, most monthly indicators show a clear slowdown. For example, in July the PMI (purchasing managers' index) fell for the third consecutive month and industrial production and retail sales posted clearly lower rates of growth than for the first quarter.
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The Fed postpones its normalization of monetary policy.
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Given the challenges appearing in this atypical post-financial crisis scenario, the main central banks have once again displayed notable flexibility in the orientation and implementation of their policies. The Federal Reserve (Fed) made use of additional quantitative measures to reinvest the sums from their mortgage bond portfolio maturing by buying up public debt. In this way, the Fed aims to avoid the risk of moving too fast in toughening up its monetary policy, given the fragile state of the economy, which the organization itself has recognized by slightly downgrading its growth and inflation forecasts.
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The European Central Bank, however, has taken advantage of the improved macroeconomic conditions in Europe to virtually stop its public debt purchase programme in secondary markets, as well as slightly reducing the loans requested by financial institutions. Consequently, excess bank reserves in the system have fallen and the one-day interbank interest rate (EONIA) saw a modest but revealing rise. The Euribor interbank interest rate has continued to increase gently, cushioned in August by greater confidence among banks and after the stress tests were published on 23 July.
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Trends in the main international stock market indices reflect the shift in concerns regarding global recovery. Fears of a possible double-dip recession for the global economy might continue for some time yet. In the medium term, however, we expect that the continued improvement in corporate profits, the improvement in the state of the financial sector and the fall in sovereign debt yields for countries on the periphery of the euro area will help to push the stock markets up.
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The Spanish economy follows in the wake of Europe...
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The Spanish economy is developing along similar lines to that of Europe, albeit with some important differences. Its economy is still recovering but at a slower pace than the euro area average. In the first half of the year, GDP grew in quarter-on-quarter terms and the year-on-year rate of change has improved substantially, standing at -0.1%, on the point of leaving negative figures. The problems of confidence in international markets due to the knock-on effect of the Greek fiscal crisis have forced the early withdrawal of fiscal stimuli and an intensification of the budget cuts, focusing on expenditure (wages, pensions and public works) and also on revenue (higher value added tax (VAT), among others). The austerity of the public sector, together with private sector deleveraging, might slow up the speed at which the country exits the recession but ensures its recovery will continue in the medium term.
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...supported by growth in household consumption...
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Domestic demand, which plummeted at the peak of the crisis, showed signs of being close to stabilizing in the second quarter, now at -0.5 percentage points. One of the main reasons for this improvement has been the growth in household consumption. After seven consecutive months of shrinkage, this grew by 2.0% in year-on-year terms, a figure not seen since early 2008. Although all the components of household expenditure have seen positive growth, of note are consumer durables, up more than 13.0%. This is fundamentally due to purchases being made earlier to avoid the VAT hike in the third quarter. Gross fixed capital formation continued to moderate its year-on-year drop, going from -10.5% in the first quarter to -7.0% in the second, but it still has a long way to go.
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...and by the continued pull of the foreign sector.
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The foreign sector is still driving business but this time its contribution to growth was just 0.4 tenths of a percentage point. Exports of goods and services increased their growth, from 8.8% to 10.5%, as the European economy became more dynamic. However, imports also increased their year-on-year growth, from 2.0% to 8.1%.
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The improved economic situation is starting to have an effect on the labour market. Employment, measured in terms of full-time equivalent jobs, has moderated its decline by 1.2 percentage points, while data from the labour force survey point in the same direction. In the second quarter, the number of employed rose by 82,700 people compared with the figure for first quarter. This is the first rise in two years, although seasonal factors have played their part. The figures for those registered as employed with Social Security in July also show an increase but, once seasonally adjusted, this becomes a fall of 27,000 people, so that we still can't say that job losses have stopped.
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The deterioration in the labour market is starting to ease.
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Together with the improvement in economic activity, the doubts regarding the solvency of the Spanish financial sector have also gradually dissipated. The vast majority of financial institutions achieved the targets for capital agreed by the Committee of European Banking Supervisors. In the third quarter, household expenditure on consumption might fall as a result of purchases made early to avoid the hike in indirect taxes. However, the improved confidence of households, the rise in companies' order portfolios and the drive provided by the foreign sector, thanks to euro area's improved prospects, should maintain and bolster the recovery throughout the second half of the year.
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30 August 2010
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Chronology
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Agenda
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