Research Dept. News
|
|
|
|
Monthly Report, num 348 - July-August 2011
|
|
|
Executive summary
|
|
|
|
|
The Greek crisis increases uncertainty
|
|
The world economy suffers a slight dip in the second quarter.
|
|
The advanced economies' growth figures for the second quarter are being somewhat disappointing and the emerging economies have also slightly moderated their rate of expansion. However, the global recovery is still on course and is expected to continue along the right path in the second half of the year, achieving the annual growth forecast, which is slightly above 4%. Among the different risks to this happening, of particular importance is the uncertainty generated by the Greek crisis, with great doubts hovering over its resolution.
|
|
|
|
In the United States, the growth forecasts for this year are tending to be lowered. The International Monetary Fund (IMF) did so in mid-June by three tenths of a percentage point, down to 2.5%, adducing temporary factors such as high commodity prices, the bad weather and alterations in the supply chain after Japan's earthquake. Nonetheless, it's clear that this recovery phase is turning out to be much slower than in the prior recessions that have occurred since the end of the Second World War. One of the reasons behind this is the heavy borrowing of households (114% of their disposable income) and of the public sector (close to 100% of the gross domestic product), within a situation of banking and financial restructuring. Job creation is progressing slowly, with a 9.1% unemployment rate in May, and any significant improvement in employment is unlikely throughout 2011.
|
|
Growth forecasts reduced for the United States.
|
|
Within this context, the Federal Reserve, the central bank of the United States, has maintained its official interest rate at minimum levels (0%-0.25%), as well as maintaining its commitment to continue with the lax profile of monetary policy for a long time to come. In his appearance in June, Ben Bernanke, Fed Chairman, repeated the intention not to renew the quantitative easing scheme (QE2), which finalizes at the end of June. Moreover, he made it clear that the central bank intends to keep the size of its balance sheet constant until conditions warrant otherwise.
|
|
The Federal Reserve undertakes to maintain the lax profile of its monetary policy for a long time to come.
|
|
In short, Bernanke stated that it was still not the time to profile the 'exit strategy', but neither was it the time to adopt a new quantitative easing scheme. He did warn of the need to redirect fiscal policy, expressing his concern given the situation of heavy borrowing that threatens the US economy if there are no substantial budgetary changes. In the short term, he asked for prompt negotiation in the Congress regarding legal debt limits which would provide the central bank with more room to manoeuvre. The markets have accepted the message given by the country's top monetary authority and do not expect the first rise in the official interest rate until well into 2012, although we still think this will happen in the first quarter of the year.
|
|
|
|
Japan is another economy seeing cuts in its growth figures due to the natural catastrophe it suffered in March. However, the most recent business indicators are favourable and confirm the expectation that, throughout the second half of the year, the country will manage to sort out its production and largely get back to the previous levels.
|
|
On the other hand, the emerging economies are being forced to tighten up their monetary policies.
|
|
The emerging economies' problems are of a different nature and are more related to inflation and the consequent tougher monetary measures. In China, activity looks to be slowing up slightly, although capital goods and machinery investment are still growing strongly. The problem is that the consumer price index also rose by 5.5% year-on-year in May, the highest rise since July 2008. Given this persistent inflationary pressure, the monetary authority once again raised the cash reserve ratio, the sixth increase this year and the second in just over a month, placing it at 21.5% for large banks. Something similar is happening in India, whose 9.1% inflation is the reason why the central bank has once again raised its official interest rate to 7.5%, accumulating an increase of 275 basis points since March 2010. Brazil has also opted to toughen up its monetary policy and, in June, once again raised the Selic rate by 25 basis points to 12.25%, given that inflation is above 6% and in spite of activity looking likely to slow up over the coming months.
|
|
|
|
In the euro area, and unlike most of the rest of the advanced economies, growth forecasts have been increased slightly thanks to the good performance by Germany and France. It should be noted, however, that indicators are pointing towards a slight slowdown in activity in the second quarter compared with the surprising growth of the first. This does not alter the belief, however, that the recovery is consolidating in the euro area, although there are still significant geographical disparities within the zone. The greatest risk over the coming months lies in the peripheral countries and, in particular, in Greece.
|
|
|
|
In fact, the Greek situation has once again focused attention on the euro area. The slowness of negotiations among the members of the European Union (EU) regarding Greece's solvency crisis, together with the paralysis of the Greek parliament, have led to further disruption in the financial markets.
|
|
Growth prospects improve for the euro area but Greece complicates the panorama.
|
|
Moreover, this might affect the real economy as a result of greater uncertainty over the coming quarters. The EU has conditioned the fifth payment of the financial bail-out (12 billion euros) and a second bailout plan, which would include a gentle, voluntary rescheduling of the Greek debt, on Greece's parliament passing the medium-term fiscal strategy. This is a programme of privatization and additional fiscal austerity measures, with larger cuts in government spending. After proposing a unity coalition government, which was rejected, changing the finance minister and overcoming a vote of no confidence, the Greek prime minister, Papandreou, has finally managed to get the adjustment package approved, which will help the new measures to be adopted that are aimed at stabilizing the Greek problem over the next few months.
|
|
Spain's sovereign bond risk premium shoots up again but is looking more robust.
|
|
The worsening of the Greek sovereign debt crisis and fears of this possibly affecting other countries is causing a 'flight to quality' in investor preferences, widening the differential between the debt of the countries of peripheral Europe and German debt. In the case of Spain, the complication of the Greek crisis, speculation regarding the cost of a possible rescheduling of its debt for the European banking sector as a whole, plus the climate of impasse perceived in Spain's economic and political situation lie behind its sovereign debt climbing above 275 basis points. However, in spite of these notable upswings, the performance of Spain's sovereign bonds still appears to be relatively more stable than for the rest of the countries of peripheral Europe.
|
|
Developments in the public accounts are being followed with great interest.
|
|
This better rating for Spanish debt results from the good performance by its public finances, presenting a 25% reduction over the first five months of the year in the central government's deficit compared with the same period a year before, while Social Security is still posting a surplus. Nonetheless, some concern can be seen regarding the accounts of the autonomous communities. Given the risk of diverting the direction of fiscal consolidation, the European Commission presented a series of recommendations as part of its review of the 2011-2014 Stability Programme. Among these, of note is greater control of the autonomous communities' public accounts and the establishment of a spending limit to improve the sustainability of Spain's debt. In this respect, the Spanish government has undertaken to include, in its Budget Stability Act, a rule that prevents increases in public spending from exceeding the growth expected for the economy in the medium term.
|
|
|
|
The IMF has also pointed out the need to meet public deficit targets and to increase the transparency of autonomous community accounts. Moreover, its preliminary report on the Spanish economy sets out the points still pending in the reforms of the financial system and employment regulations. In the former, it recommends that those institutions that do not achieve the minimum capital requirements should be quickly restructured, and encourages banks to continue recapitalizing and improving their liquidity and reserves. With regard to labour market reforms, it notes the appropriateness of decentralizing collective bargaining to the level of the firm, doing away with wages linked to inflation and replacing this with productivity, as well as reducing severance pay to the EU level.
|
|
The government approves the collective bargaining reform.
|
|
In fact, in June the government pushed through the collective bargaining reform. This reduces the prevalence of provincial agreements on the firm, although sector agreements can prevent company agreements from developing a large number of areas. Similarly, firms can also adjust to the economic cycle by making available 5% of the annual work day, and an attempt has been made to limit ultra-activity, i.e. the indefinite extension of agreements when collective bargaining has not been successful. In other provision, firms with temporary losses can file for an official redundancy plan.
|
|
|
|
For the moment, the labour market can't seem to achieve positive figures. Although the number of people registering as employed rose in May, such improvement was largely due to the seasonal factor of the period as, once corrected, this positive result disappears. Although the total number of employed rose by 117,990 people, very slightly reducing the fall in this figure to 1.0% year-on-year, this rise evaporates when the seasonal effect is taken into account.
|
|
Growth prospects are slight but the foreign sector's good performance and easing commodity prices give grounds for hope.
|
|
The poor job creation figures are related to the fragile progress being made by the economy, clearly lower than that of the euro area as a whole. Available indicators suggest that, over the coming months, this rate of growth will not improve and that, in fact, it will probably slow up slightly. In particular, the contribution of domestic demand is expected to be negative during the second quarter, so that the support provided by the foreign sector will continue to be crucial. Actually, the good pace of growth enjoyed by Spain's main trading partners will keep the foreign sector's contribution positive for the remainder of the year, helping to offset the weak domestic demand. Contained prices for oil and other commodities will also help to improve domestic income and will alleviate the currently high inflation rate. Lastly, the possible resolution of the current negotiations regarding the Greek crisis should sort out economic prospects in the medium term and will ease the financing costs that are now hitting Spanish debt hard.
|
|
|
|
29 June 2011
|
Chronology
|
|
|
|
|
|
Agenda
|
|
|
|
|
|
|
|
You can susbcribe now to be nofified by email every time the Monthly Report is updated in the internet.
|
All documents are in Adobe Acrobat format (PDF).
To view a document in PDF format you need the Adobe Acrobat Reader. If you don’t have it already loaded on your computer, you can donwload it now.
|
|
Direct link to the Research Dept. in your mobile
We'll send you a free SMS with the link
|
