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United States
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The United States: better and with a modest 2012
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The United States grows by 0.7% in the fourth quarter.
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The US economy is consolidating its recovery and stands at the head of the advanced economies. As this report goes to press, the Department of Trade announced that growth in gross domestic product (GDP) for the fourth quarter picked up to 0.7% quarter-on-quarter, 1.6% year-on-year, leaving the growth figure for the whole of 2011 at 1.7%. This consolidation is supported by an improved labour market, which is exceeding the expectations held just two months ago and has contributed greatly to the improvement in the sentiment of consumers, who account for 71.0% of GDP. But consolidation does not mean abundance. The strength of the fourth quarter, based on a low savings rate and an upward cycle of stock, should give way to growth with a more modest tone. The advance for the whole of 2012 is therefore unlikely to exceed 2.0%. There are various reasons for this low profile. Most importantly, household income continues to increase unhurriedly, so that consumer spending should return to the fold in the first quarter of 2012.
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The deleveraging of household debt will also continue, whose gross debt stood at 114.1% of disposable income in the third quarter of 2011, lower than the peak of 129.9% of September 2007 but still above the range of 90-100 for the long-term trend. The cost of oil, whose price is refusing to fall, won't help to relieve consumer budgets either. Thirdly, Europe's debt crisis will also be a burden on growth by deteriorating the trade balance and financial conditions. Lastly, fiscal expansion, which supported activity in 2010 and 2011, will continue to lose steam due to the levels of debt reached. But the possible approval, in February, of an extension to the tax exemptions for contributions paid by companies for their employees and in unemployment insurance will help to underpin a growth that still needs some assistance.
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For 2012, advances will moderate due to stagnation in revenue and the European crisis.
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The latest indicators for economic activity show the upswing in private consumption slowing down. The first sign of this came from national accounts. Household income came to a standstill in November at the same time as private consumption grew by a meagre 0.1% compared with October. With this, the savings rate fell to 3.5% of disposable income, the lowest level since December 2007. The Christmas campaign was also worse than Thanksgiving, with retail sales without cars or petrol falling by 0.1% in December compared with November's figures. On the plus side for consumption, the incipient improvement in the labour market continues to encourage more optimistic sentiment among consumers. The Conference Board Consumer Confidence index advanced in December to 64.5 points, the highest since April 2011 and far above the 40.9 points of October, although it's true that today's level is still more typical of recession than expansion.
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The labour market improves, with unemployment down to 8.5% and under-employment falling.
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Beyond the ups and downs of private consumption, the labour market is where the most significant improvement is taking place in the economy. The true measure of how 2012 will turn out will be whether employment continues to improve. The unemployment rate fell again in December, ending the year at 8.5%, a level clearly lower than the one expected in summer. Although this drop in unemployment is partly due to a reduction in the labour force, 1.64 million net jobs were created in 2011 and more than two million since the start of the recovery. The rapid drop in under-employment is also significant; i.e. those workers who are working part-time involuntarily, which went from 9.1 million in September to ending the year slightly below 8 million, the lowest since January 2009. The rise in the number of hours worked, a leading indicator of the fall in under-employment, also rose slightly, suggesting this trend will continue. Nonetheless, the job market still has a long way to go before it recovers completely. The jobs created in 22 months of recovery represent just 30.3% of the 8.75 million jobs lost during the crisis, while the purchasing power of wages ended 2011 below the level reached at the end of 2010.
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Business sentiment is in line with growth slightly above 2%.
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The business climate is in line with this situation of growth that, although moderate, is becoming firmer. The business sentiment indices of the Institute of Supply Management (ISM) for manufacturers and services continued to improve, although still not far from the reference level of 50 points. The respective levels of 53.9 points in manufacturers and 56.2 in services are typical of relatively modest growth, close to 2.5%. Industrial production, which livened up a little in December, is enjoying a slight recovery that is somewhat more robust than the one in 2002-2007 but far below the boom in the 1990s. With a similar profile, industrial capacity utilization continued to improve up to 78.1%, although this also reveals that a large amount of resources are still idle.
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Housing prices almost touch bottom but their recovery will have to wait until 2013.
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The oversupply that is still affecting the housing market is stopping it from reaping the benefits of this incipient improvement in the job market. The price of real estate is close to bottoming out. The relationship between median housing prices and household income shows a return to normality, so that real estate prices can be considered as reasonable. However, it's one thing to be close to bottoming out but a very different thing to move away from this bottom. Surplus supply and credit conditions are hindering recovery. The Case-Shiller index for second-hand housing continued to slide downwards in October, while new homes started in December, at a lower level than half the average for the period 1995-2000, prior to the bubble, disappointed by falling compared to November. Even if the unemployment rate continues to fall throughout 2012, which should eventually result in a fall in non-performing loans and, consequently, in the surplus supply of housing, we are unlikely to see any signs of improvement in the sector before 2013.
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For its part, inflation continues to fall slightly due to the persistent low utilization of production resources. This trend should become sharper over the coming months due to the base effects of oil prices that, should they remain at their present level, will go from year-on-year increases of 28.0% and 16.9% in November and December 2011, respectively, to a drop of close to 5% in March 2012. This should curb the rise in the consumer price index (CPI). This process has already started, with December's CPI rising by 3.0% compared with 3.4% in November. Similarly core inflation, which excludes energy and food prices, also rose by 2.2% year-on-year. But the trend is downwards, with an end to the boost provided by imputed rent and the upswing in durables due to the effects of Japan's tsunami. All this leaves space for new expansionary policies by the Federal Reserve in the case of a decline in demand's growth.
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The trade deficit widens due to a decline in exports.
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In the foreign sector, the correction in the trade imbalance has halted due to a slowdown in world demand. The trade balance for goods and services in November was 47.8 billion dollars, 10.4% above the figure for October. This deterioration was mainly due to the drop in exports, down for the second month in a row. Weak global demand will mean that, in 2012, the foreign sector's contribution to growth will be negative, or zero in the best case scenario. Growth will therefore have to depend on domestic demand, which will look for support from the confirmation of recovery in employment.
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The case of debt in the United States: a movie with a happy ending?
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While all the spotlights have been turned on the European sovereign debt crisis, behind the scenes the United States has been trying to establish a fiscal policy that ensures its public debt is sustainable. Although the actors in the drama are the same on both sides of the Atlantic, namely a large deficit and the debt ratio, the United States' commitment to growth represents quite a different strategy to the paradigm of austerity prevailing on the Old Continent. For the moment, the European script has moved the US plot into the background. It might, however, soon get a bigger audience.
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According to IMF estimates, the United States ended 2011 with a deficit close to 10% and a debt that is dangerously near 100% of GDP. At the other extreme, Germany is trying to gradually reduce its debt nowadays close to 83%, in spite of having a deficit estimated at 1.7%. Meanwhile, in Spain, the current government is justifying its adjustment programmes after estimating 2011's deficit at close to 8% and its debt around 70% of GDP.
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The US libretto is hoping to use debt to set up an expansionary policy and thereby return to the path of growth. Such growth would mean that the future interest on debt could be paid. In Europe the strategy is the opposite; reducing deficit and controlling debt so that the economy can grow again once it is no longer burdened.
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For the present, the markets are rewarding the US approach and the consensus of analysts expects the United States to grow by close to 1.8% in 2012 while the euro area will enter into recession (with an estimated fall of 0.3%). For investors, the United States has become a safe haven as, since the start of the crisis, yields on US bonds have fallen to record lows, even paying out negative returns. Apart from the liquidity injection carried out by the Federal Reserve, global uncertainty has acted as a balm on the United States' national accounts.
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Unlike the countries in the euro area whose solvency is being questioned (Greece, Portugal, Ireland, etc.), the United States enjoys enough political credibility to adjust its national accounts when necessary and, at present, few doubt its capacity to grow, based on its greater dynamism and flexibility; although its position is weakening on both fronts.
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On the one hand, the United States' growth potential might have been harmed. The bursting of the real estate bubble, the deleveraging of the economy and also less spending on infrastructures, which the country will have to tackle at some point, precisely because of the reduction in the deficit, will damage its capacity to grow. In fact, the Congressional Budget Office, the government body that provides Congress with objective budgetary information, places US growth at around 2.5% as from 2016. This is lower than the growth rate for the last 30 years, specifically 3.0%.
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On the other hand, as time passes the United States is running out of leeway to adjust its national accounts. Already in 2010, a Congressional Committee(1) warned that «Our nation is on an unsustainable fiscal path», and recommended to start extensive adjustments to achieve a public deficit of 2.3% by 2015. The Congressional Budget Office estimates that, should the current fiscal policy be continued, federal debt (which accounts for almost 70% of US public debt and is legislated directly by Congress) would reach almost 100% of GDP in 2020 and interest would total a trillion dollars the same year (equivalent to 4.1% of GDP in 2020). The graph below shows in yellow (alternative scenario) the path that debt would take if no measures were implemented.
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Moreover, one of the pillars that might sustain the credibility of fiscal policy is seriously in doubt. The United States has a debt ceiling (the maximum amount that can be reached every year by the central government's debt, known as Federal debt in the United States) which needs Congress's approval to be raised. However, this ceiling does not represent any effective limit as it has been increased without any major complications almost every time this has been necessary.
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In addition to being far from an instrument to control public finances, the debt ceiling is actually making it difficult to define a fiscal adjustment plan. This was highlighted last summer when another raise was necessary to be able to finance the debt maturing. This time, however, differences between Democrats and Republicans delayed approval for the increase up to one day before the debt came due, thereby fuelling rumours of a possible default. The reason behind these differences: the lack of agreement between the two large parties regarding how and when fiscal consolidation should be carried out.
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These signs of political paralysis, almost unheard of in the United States, justified the agency Standard & Poor's withdrawing the country's triple A rating, the highest possible. The agency also believes that the agreement reached between Republicans and Democrats «falls short of what... would be necessary to stabilize the government's medium-term debt dynamics».(2) In particular, the Budget Control Act passed last summer authorizes an increase in the debt ceiling of 2.1 trillion dollars (14% of US GDP in 2011) in 10 years. This rise is gradual and provides enough leeway so that the ceiling is not expected to be raised again until after November's presidential elections.
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In exchange, a reduction in current expenditure has been established totalling 917 billion dollars over the next 10 years, which immediately came into effect, and a two-party commission was set up called the «Supercommittee», with the aim of identifying a further 1.5 trillion of structural adjustment, also over the next 10 years. The Act also stipulates that, if the Supercommittee did not reach an agreement by 23 November, there would be an automatic adjustment of 1.2 trillion, whose cost would be shared equally between domestic and defence spending.
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Finally, the Supercommittee did not reach an agreement and the automatic adjustments will therefore begin in January 2013. Consequently, the aim is to stabilize debt and place the United States on the blue line shown in the graph below (main scenario). Both defence cuts and also the cuts in domestic spending are not detailed and Social Security, Medicaid (healthcare for low income people) and other programmes for people on low incomes are exempt. This lack of precision will perhaps give rise to further rounds of negotiation after November's elections.
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(1) National Commission on Fiscal Responsibility and Reform (December 2010), «The Moment of Truth».
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(2) Standard & Poor's (August 2011), «United States of America long-term rating lowered to ?AA+' on political risks and rising debt burden; outlook negative».
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Although there are no signs that a tragedy is probable or imminent, the higher the debt, the greater the risk, as well as the greater likelihood of further rating downgrades. The public is fickle and Europe's experience has shown that adjustments are more painful the later they occur, and it's not the same to make adjustments during a boom as during a time of uncertainty. The United States has chosen to wait until things improve and, for the moment, it seems to be doing well.
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(3) Series of assumptions established by the Congressional Budget Office in «The Long-Term Budget Outlook» (2011).
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This box was prepared by Víctor Burguete
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European Unit, Research Department, "la Caixa"
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Japan
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Japan: recovery in jeopardy
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Japan sees the steam go out of its recovery.
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Pending confirmation of the recovery in 2012, after the tsunami in March and the nuclear crisis of Fukushima, the latest indicators show a downward bias, particularly in manufacturing industry and exports, the traditional drivers for Japan's economy. On 26 December last year, the prohibition was lifted to export weapons, a law dating from 1967 that was highly symbolic.
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Industrial production falls, hit by the yen's appreciation and rising electricity costs.
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The end of this tradition will allow Japanese companies to take part in high tech projects such as the F-35 combat fighter jet. However, the fact is that any amount of aid falls short for the beleaguered manufacturing industry of a country where dedicating yourself to «monozukuri» (making things) really counts for something.
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Exports are affected by the global slowdown and the trade deficit hits a record high.
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Industrial production is losing steam after an initially robust recovery from its minimum levels last March. November's decline compared with October was 2.7%, 17.5% below the average for the first five months of 2008, the period prior to the world trade crisis. The yen's appreciation and rising electricity costs, which are 2.5 times those of South Korea due to the tsunami, continue to hinder the recovery. The Tankan sentiment index for large manufacturing firms shows a downward trend, indicating that this pattern will continue in the first half of 2012.
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The slowdown in world demand has come on top of these domestic woes. Exports contributed four fifths of the growth in the economy as a whole in the third quarter but this contribution will be drastically cut in the fourth quarter of 2011 and the first half of 2012. After a strong push in May and June, exports slowed up and then fell in October and November. The consequence of this is that the trade deficit for the last 12 months reached 1.7 trillion yen, the highest since 1963.
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Fiscal policy will be expansionary, with the CPI falling by 0.5%.
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Because of these difficulties in the private sector, fiscal policy for 2012 will continue to be expansionary. Of the 90 trillion yen budgeted for expenditure, 68.4 trillion excluding interest payments, only 42.3 trillion will come from tax revenue, the rest coming from issuing debt, swelling a figure that exceeds 200% of GDP.
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In this respect, the 5% hike in tax on consumption continues to encounter political difficulties in an economy that is still deflating. The CPI fell by 0.5% year-on-year in November while the core CPI, the general index without energy or food, fell by 1.1%.
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China
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China: towards a soft landing
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China is slowing up, growing by 8.9% in the fourth quarter.
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China is underpinning its soft landing with 8.9% growth year-on-year in GDP for the fourth quarter, so that the economy will have grown by 9.2% for the whole of 2011. This rate should fall in 2012 down to 8.4% for the whole of the year, a rate that, although high in comparison with all advanced economies, is close to the limit of 8% which, according to the Chinese government, guarantees stability and peace in society. That's why the authorities' top priority is to ensure growth.
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Inflation moderates to 4.1% but food prices rise by 9.1%.
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Controlling inflation, which had been the main aim up to September, has been relegated to second place. December's CPI rose by 4.1% year-on-year, almost the same as last November and far from July's figure of 6.5%. However, this does not mean that inflationary pressure has been averted. The price of labour continues to rise due to the social changes occurring in the country and the CPI for food, which accounts for half of the general index in China, picked up slightly to 9.1%. Nonetheless, December's figures leave room for expansionary policies.
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The brusque halt in housing is the biggest risk to the main scenario of a soft landing.
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The main scenario is one of a soft landing supported by the underlying trends in China's economy. But the risks tilt downwards, with a brusque halt for two of the pillars to growth over the last few years: housing and exports. The housing sector, which accounts for 13.0% of the total economy, is at a standstill. Prices have stopped rising and falls have been posted in significant zones such as Whenzhou, in the dynamic province of Zhejiang. Land under construction has fallen by 25% and December's sales were down 8.4% year-on-year, when in the third quarter they had grown by 12.9%. The positive side to this lies in the fact that lower inflation will allow monetary policies to stimulate the sector, such as reducing the cash reserve ratio. Meanwhile the exodus from rural areas continues. In December, the urban population exceeded the rural population for the first time in China's history. This movement also supposes a strong source of demand that should help to bolster the sector.
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The foreign sector continues to lose steam but metal imports grow.
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For its part, the foreign sector continues to decline. December's trade balance totalled 16.5 billion dollars, somewhat higher than the figure for November but without changing its downward trend. Exports grew by 13.4% year-on-year, a very low rate for the Chinese economy. In the case of imports, the signs of a slowdown are more ambiguous. Although year-on-year growth was 11.2%, within a lower range, this was partly due to strong base effects. Basic metal imports such as copper, which in China is an indicator of industrial activity, were definitely on the up, supporting the main scenario of growth in excess of 8%.
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Industrial production and retail sales indicate an underlying resistance to growth.
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Following a similar pattern, industrial production picked up slightly in December, up by 12.8%, proof that there is underlying resistance in the Asian giant's activity. Another positive factor was provided by the retail sales of consumer goods, up 18.1% year-on-year in December. Private consumption, which continues to be the one big element missing from the growth equation, with a relative weight in the economy that hardly reaches 35%, has great potential for growth. The problem is whether it will liven up quickly enough to offset the decline in exports and a possible halt in the housing sector.
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Brazil
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Brazil: slowdown under siege
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In Brazil, inflation moderates towards the end of 2011 and ends the year within the target range.
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Towards the end of 2011, inflation provided a welcome break for Brazil's economy and closed the year at 6.5%, just enough to be within the target range of 4.5% ± 2.0%. Supported by this change in trend, the Monetary Policy Committee stuck to its script and reduced the SELIC rate by 50 basis points at the end of January. The official interest rate is therefore back to 10.50%, a level that is still high compared with other emerging economies but which we expect will continue to fall over the coming months.
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This forecast assumes a scenario in which Brazil's economic growth will remain at around 3.0% in 2012, below its potential, and in which price rises will continue to converge towards their central target (4.5%). Should tensions in Europe abate more quickly than expected or the rate of economic activity at a global level pick up substantially, the economic outlook for Brazil would also be more buoyant, as well as tempering the need to intensify the expansionary tone of its monetary policy. However, for the moment and after the sharp slowdown in the third quarter, Brazil's economic authorities are still prepared to use all the weapons in their arsenal to ensure the economy has a soft landing.
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The economic policies are expected to remain countercyclical in tone.
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For the moment, the countercyclical shift taken by economic policies at the end of the summer seems to be having an effect. Since mid-November, macroeconomic indicators have been showing a tepid upswing in the rate of activity and the bulk of the evidence available suggests that Latin America's leading economy will have grown again in the last quarter of 2011. Retail sales continued to rise, once more revealing the resistant appetite of Brazilian consumers, while industrial production increased by 0.3% in month-on-month terms after three previous months of falls.
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Nonetheless, some moderation could also be seen in the correction of prices. This is a figure that calls for caution, as there is still the risk that, if the current course of official interest rate cuts goes on too long, the production fabric and prices will be put under pressure again, compromising the use of further interest rate cuts as a countercyclical policy instrument. This risk becomes greater if we take into account the fact that the recent weakness in the real doesn't help to control prices either, or that fiscal policy has also taken on an expansionary air in the first few months of 2012; to begin with, the 14% rise in the minimum wage led to rises both in pensions and other social benefits indexed to this wage.
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On the other hand, the Brazilian authorities' desire to preserve the tone of economic activity can also be seen in its current handling of commercial policy. Over the last few weeks, a greater effort has been made to stifle competition from foreign products in the domestic market, at the same time as tensions have worsened with Argentina due to the intensification of protectionist measures by its neighbour to the south. Nevertheless, we should praise the reaction of Brazil's authorities, avoiding reprisals and giving themselves until February to evaluate the impact of these measures on its exports.
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In short, Brazil is facing a 2012 that will require a firm hand on the rudder. The bridge of the ship has made it clear that its main aim is to ensure comfortable growth without any surprises but this does not mean it can let down its guard with prices.
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Mexico
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Mexico: prices speed up while growth moderates
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In Mexico, inflation ends 2011 at an annual high but within its target range.
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In December, inflation rose for the third consecutive month in Mexico, ending 2011 at an annual high of 3.8%. This acceleration in prices reflects the rise in tobacco, food, transport and clothes but also the impact of the peso's recent depreciation, which hit the cost of imported goods but, for the moment, has not led to any second-round effects. Although we expect this trend to continue in the first few months of 2012, it is a temporary rather than an underlying trend, so we have kept to our forecast that the inflation rate will remain within its target range throughout 2012. The output gap will remain in negative terrain, which should stop domestic demand from putting too much pressure on prices - in fact, core inflation for services, which best reflects the domestic influence on inflation, seems to be staying at a relatively low level for the moment.
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In any case, the renewed vigour of inflation and perceptible economic improvement in the United States are tempering the temptation to give an expansionary shift to monetary policy. Nevertheless, Mexico's economic authorities have made it clear that they are prepared to introduce new stimuli should global economic conditions deteriorate more than expected and have a negative impact on the outlook for the local economy.
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For now, macroeconomic indicators suggested that Mexican production continued to expand during the last part of 2011, although more slowly than in previous quarters. Although it's true that this slowdown could be attributed largely to a more sluggish foreign demand, a certain deceleration is also starting to be perceived in some components of domestic demand, which would impose additional downward risks on our main scenario in which the Mexican economy would grow by around 3.5% in 2012.
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Commodities
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Metals react upwards while oil remains the same
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The upswing in prices and perceptible economic improvement in the United States delay any expansionary shift in monetary policy.
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The price of crude remained practically unchanged between 22 November and 23 December, gaining 2.5%, taking it to 110.70 dollars per barrel (Brent quality, for one-month deliveries), 3.3% higher than the start of the year and 13.7% higher than last year's level.
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Oil reaches 110.7 dollars, following a largely stable trend.
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Oil prices are following the same trend due to geopolitical uncertainties in the Strait of Hormuz, through which 35% of the world's trade passes every day, and due to a global demand that has not eased up. Should prices remain close to the level of 110 dollars per barrel, as from March 2012 oil should contribute towards a reduction in the inflation rates of most countries due to base effects since, between March and June 2011, crude far exceeded the reference price of 120 dollars per barrel because of the Libyan crisis.
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Metals pick up while food prices remain sluggish.
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There was a possible upward change in trend in the rest of commodities, led by metals, due to China's import figures, which is the world's main buyer. While the CRB Index gained 3.0% between 22 December and 23 January, copper, aluminium and nickel grew by 10.9%, 9.9% and 8.6%, respectively. In general, precious metals also followed the path taken by basic metals, with the exception of gold, whose more modest rise of 4.5% took it to 1,677 dollars per ounce. Food, nevertheless, continued to fall, which should ease China's inflation to some extent, as well as that of other emerging economies.
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