Research Dept. News
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Monthly Report, num 352 - December 2011
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Executive summary
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The euro area goes into intensive care
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The sovereign debt crisis continues to get worse.
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The world's economic growth is losing steam but is still high thanks to the emerging countries, although they are not immune to the difficulties affecting the developed world. Here, consumer and business confidence is losing ground amidst growing concern regarding the expected developments for the coming year. Financial markets are suffering directly and harshly from this uncertainty. The biggest problem is still the euro area, which has yet to find a path out of a sovereign debt crisis that is threatening the very foundations of monetary union and has already contaminated the real economy.
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In the United States, October's business indicators show that the third quarter's upswing has continued, with gross domestic product (GDP) growing by 0.5% compared with the previous period, at 1.5% year-on-year. This should result in growth of close to 2% for 2011 as a whole. The risk of a double dip recession has therefore significantly diminished, thanks particularly to the mood of consumers, cheaper oil prices and industrial investment. However, the labour market is the true sounding board for this crisis. The problem here is the slowness of the recovery. Between March 2010 and October 2011, i.e. in 20 months of recovery, the US economy created 2.3 million jobs, a figure that is very far from the close to nine million lost between 2008 and 2009.
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Growth prospects improve for the United States but have yet to galvanize.
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With this panorama of low growth, the favourable trend in inflation gives the Federal Reserve leeway to employ expansionary policies to boost employment and mitigate the problems of bad mortgage debt, with a real possibility of a third round of quantitative easing in 2012. For the moment, the US central bank has made clear its dual proposal to encourage sustained economic growth and keep prices stable. It has also repeated its commitment to keep the reference rate at the minimum range of 0%-0.25%, thereby confirming that its programme of exceptional monetary policy measures will continue. For now, the main issue resides in the lack of political agreement on what the route map for fiscal consolidation should look like.
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With regard to Japan, after three consecutive quarters of declines, the economy confirmed its recovery from the effects of the tsunami and nuclear crisis in March. Third quarter GDP was higher than expected, up 1.5% quarter-on-quarter, leaving it just 0.2% below the level of the same period a year ago. This recovery was based on robust growth in private consumption, up by 1.0% quarter-on-quarter, and on the recovery in exports, growing by a resounding 6.2%, from a very low starting point. However, the latest figures raise doubts as to whether this expansion can go much further.
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The emerging economies are still growing but somewhat less.
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In China, the restrictive tone of its economic policy in the first half of 2011, aimed at containing inflation, has helped to slow up economic activity so that GDP will grow slightly below 9% in the fourth quarter. For the moment, the anti-inflationary battle is having an effect, as the consumer price index (CPI) increased by 5.5% year-on-year in October, clearly lower than the 6.1% of September, while the rate for foods and production prices also moderated. This slowing trend in the economy has also intensified in Brazil over the last few months. In September, and without any warning, Brazil's central bank lowered its official interest rate, lowering it again in October, and the bulk of the evidence available suggests that it will cut the rate by another 50 basis points at the end of this month, leaving it at 11.0% until the end of the year. The capital requirements for consumer credit have also been relaxed and further stimuli of a similar nature have not been ruled out.
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The euro area is likely to suffer from a moderate recession.
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Third quarter GDP was not very encouraging in the euro area. In quarter-on-quarter terms it grew by 0.2%, resulting in a 1.4% year-on-year rate of change. However, macroeconomic indicators are producing worrying signs, pointing to a slowdown in economic activity for the coming quarters. Job losses and the fall in disposable income are slowing up household consumption, while the difficulty in accessing credit and fragile demand are affecting industry.
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The ECB relaxes its monetary policy...
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Given this outlook, we have reduced our growth forecast for GDP in 2012, which was 1.3%, to 0.3%. We expect the euro area as a whole to enter a moderate recession with two consecutive quarters of negative growth, something the new president of the European Central Bank (ECB), Mario Draghi, already warned of in his appearance in November. In fact, at its November meeting, the monetary authority lowered the official interest rate by 25 basis points to 1.25%. According to Draghi, this change in direction of monetary policy was adopted unanimously, this being the first cut in interest rates since May 2009. He also said that the decision was taken due to continued pressure in financial markets that is affecting the stability of the euro area, as well as the persistence of the current risks related to the delicate financial situation of the peripheral countries and the slowdown in activity.
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Not only have the agreements reached at October's summit failed to contain the interminable sovereign debt crisis of the euro area's peripheral countries, this has even become bigger, and to a worrying extent. November was marked by a strong upswing in the risk premia of most economies, particularly in Italy and Spain. Albeit to a lesser extent, the spread between French debt and the German bund has also widened due to the doubts of some rating agencies regarding France's capacity to meet its deficit targets and its banks' high exposure to the debt of countries in the firing line. Within this context of growing instability, the ECB's purchases of Italian and Spanish debt barely calmed the nerves of investors, witnesses to how market pressure was forcing political changes in Greece and Italy. This situation has now been reflected in the recently issued Italian and Spanish bonds, whose yields rocketed due to greater risk aversion.
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...but the key lies in the lack of progress made in resolving the sovereign debt crisis.
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In November, the euro lost close to 3% against the US dollar but the crisis has hit stock markets the hardest due to the perception that the measures adopted are not very effective and too slow, as well as the widening spread between the countries affected and Germany and, above all, due to the consequent fear of the crisis infecting the rest of the euro area and countries lending funds to Europe. The sector that is being hardest hit by investors is banking, due to its high exposure to the region's sovereign debt and the limited prospects of gains in the new, more restrictive regulatory environment.
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A squeeze is also starting to appear in Spain...
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The greater tension in debt markets over the last few months is jeopardizing the capacity of economies such as Spain to secure external financing, a difficulty that is in addition to an increasingly complicated situation overall. The credit squeeze, job losses, fiscal adjustments, falling confidence and less favourable external environment all make for a contracting scenario. Spain's GDP growth stagnated in the third quarter and has probably entered recession in the last quarter of the year. We expect a slight contraction in activity, forcing us to adjust downwards our growth forecast for 2012 as a whole, from 1.1% to 0.2%. Moreover, while no credible solution is reached for the euro area crisis, any risks to this forecast are clearly downward.
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One of the factors forcing us to lower our growth forecast for Spain for the coming quarters is precisely the loss of steam in world trade and the slowdown in growth of the European economy. The foreign trade figures for September show, for the second month in a row, an increase in the trade deficit due to the slight upswing in imports resulting from higher energy prices. In spite of this slight deterioration, the total current deficit accumulated over the last twelve months speeded up its rate of contraction in August, with an 18.0% year-on-year decrease. This correction is due to the good performance by the balance of services and transfers, offsetting the increase in the deficit recorded in the balances of goods and income.
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...with a labour market that continues to destroy jobs.
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But the greatest challenge still lies in the weak domestic demand. A cause and consequence of this is the bad situation of the labour market, once again highlighted by the labour force survey carried out every quarter by the National Institute of Statistics. According to this survey, the number of unemployed rose by 144,700 in the third quarter and is now close to five million. Consequently, the unemployment rate increased by a little more than 0.6 percentage points compared with the previous quarter and reached 21.5%. We have to go back to the mid-1990s to find a similar rate.
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Of note is the fact that, in the third quarter, public employment continued to increase, so that it now accounts for 21.2% of all salaried employment. Since the start of 2008, 347,400 public jobs have been created while the private sector has lost almost two million jobs over the same period. However, cost-cutting policies have already started to produce declines in public consumption, namely 1.1% in the third quarter, thereby placing the year-on-year rate of change at -2.3%, 5 tenths of a percentage point below the figure for the previous quarter.
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European leaders meet again in December to calm down the debt crisis.
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It's vital to regain confidence and to relax financial conditions in order to improve growth prospects. As has been mentioned above, clear political agreement is essential in the European Union to achieve this aim, as well as setting up substantial mechanisms to support sovereign debt and the banking system. Is this possible? Right now, another meeting has been arranged for early December, in which new measures might be taken to advance towards economic and perhaps budgetary integration, giving a more relevant role to the central bank and perhaps even looking at the creation of Eurobonds, as proposed by the European Commission. We must hope that this meeting does not become yet another anti-climax, dashing the expectations created, as has happened on the last few occasions.
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28 November 2011
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Chronology
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Agenda
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