|
|
|
|
Too many loose ends in the euro area to reduce uncertainty
|
|
While the euro area's political negotiations are taking their time, economic expectations are deteriorating.
|
|
Economic expectations in the euro area have worsened over the last few months. One of the reasons for this deterioration comes from the political sphere. The sovereign debt crisis has highlighted the urgent need to reform the foundations of the monetary union. However, the long negotiation process is affecting its credibility. On the other hand, macroeconomic indicators continue their declining trend.
|
|
|
|
Focusing on the first aspect, the negotiations on the euro area's fiscal pact are progressing slowly. However, in a joint statement the president of France, Nicolas Sarkozy, and the German chancellor, Angela Merkel, stated that they were satisfied with the progress being made. The details, however, are still not known.
|
|
|
|
The second focus of negotiation lies between private creditors and the Greek government on the extent of the write-down for Greece's debt. The latest news indicates that an agreement will be reached to finally proceed towards an exchange of the bonds affected by a new issuance of Greek public debt. However, the terms are still being negotiated and the percentage of creditors that might accept this exchange is not clear.
|
|
S&P downgrades its credit rating for several member countries of the European Union.
|
|
It's evident that, while sweeping projects are being negotiated, such as the new fiscal pact, combined with new proposals for regulatory changes, the level of uncertainty is unlikely to diminish. This has led the credit rating agency S&P to downgrade nine countries, including France and Austria, down one notch from AAA to AA+. Due to the loss of the top credit rating for several member states of the euro area, S&P has also reduced to AA+ the rating for the European Financial Stability Facility.
|
|
|
|
Paradoxically, this rise in the risk profile for the euro area has not affected the sovereign debt issuances of these countries, which have managed to sell their assets at lower interest rates than in issuances prior to S&P's announcement. This is probably because the market had already incorporated these decisions in the price of financial assets. Nevertheless, now Portugal has a rating of BB by S&P. This level on the credit rating scale is known as a speculative grade or junk bonds. S&P has currently assigned a BB rating to countries such as Cost Rica, Serbia, Guatemala and the Philippines.
|
|
Economic agents show great caution in their spending and investment decisions.
|
|
This high level of uncertainty has harmed the expectations of economic agents and they are showing their scepticism by being highly prudent in their spending and investment decisions. In fact, with regard to demand, household consumption can be seen to be advancing weakly. This lethargy is reflected very clearly in November's retail sales figures, down 2.4% year-on-year, accelerating the trend of the last few months, as can be seen in the graph below. And the short-term outlook seems to be worse as December's consumer confidence index was at a record low of -21.1, a level not seen since August 2009.
|
|
|
The foreign sector posts a surplus of 6.9 billion euros in November.
|
|
With regard to the foreign sector, the slowdown in domestic demand in the euro area is being offset by an improvement in the trade balance with other countries. In November 2011 this posted a surplus of 6.9 billion euros compared with a deficit of 2.3 billion in the same month of 2010. Seasonally adjusted, exports grew by 3.9% compared with October, while imports stabilized.
|
|
|
|
From the point of view of supply, a widespread deterioration can also be seen in short-term expectations. In November, the euro area's industrial production fell by 0.1% month-on-month while year-on-year growth decreased to -0.3%. Looking at a breakdown of the industrial production index, durables and non-durables both fell month-on-month by 0.8%, which could not be offset by the rise in energy (0.5%). Geographically, the pleasant surprise of France posting 1.1% growth month-on-month could not offset the falls in Germany (1%) and Spain (1%).
|
|
|
|
Not all the news is bad, though, and we should point out two positive aspects of the indicators for the economic situation. Firstly, political uncertainty has depreciated the euro and this should have an impact on foreign trade in the coming quarters. Although, on the other hand, it also entails a potential risk of oil imports becoming more expensive.
|
|
Industrial production continues to deteriorate.
|
|
However, the latest inflation figures for December in the euro area were down from the 3.0% of November to 2.7% year-on-year. The weak aggregate demand which supposes a loss of price-setting power by firms, in combination with stable oil prices, has led to a reduction in the consumer price index. The expected downward slide in the harmonized CPI will have a positive impact as households' real disposable income won't deteriorate so much.
|
|
|
|
|
A series of factors has altered the forecast for growth this year in the euro area. Firstly, the World Bank has cut its world growth forecast from 3.6% to 2.4% for 2012. This decrease will hit European exports, as four of the eight countries that export the most in the world are members of the euro area. Secondly, the additional deterioration during the last month in macroeconomic indicators augurs several quarters of negative growth.
|
|
Lower world growth, political uncertainty and the state of the financial system force a downward revision of economic growth.
|
|
Moreover, doubts have arisen as to whether euro area countries will be able to consolidate their national accounts in a context of lower growth. In other words, there is the risk that the additional cuts announced in countries such as Italy and Spain, among others, might harm economic activity. Lastly, it's very likely that the uncertainty regarding the European banking system's capacity to recapitalize will keep the squeeze on credit for the private sector for a few more months.
|
|
|
|
All these elements have led us to revise downwards our forecast for growth in the euro area's gross domestic product for this year, down six tenths of a percentage point from 0.3% to -0.4%. There's no doubt that the deteriorating economic expectations for the euro area are resulting in more prudent behaviour on the part of economic agents in their decisions to consume and invest.
|
