Research Dept. News
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Monthly Report, num 356 - April 2012
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International review
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United States
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The United States: a little better, every day
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The United States might grow by 2.0% in 2012, supported by domestic demand and stimulus measures.
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Our growth forecast for the US economy for 2012 as a whole remains at 2.0% but the risks that might reduce this figure have also diminished slightly. Although the European debt crisis and oil prices are still considerable hazards, internal risks have lessened. Monetary and fiscal stimuli have helped to bring about a reduction in private debt and a recovery in the labour market that underpin the current levels of growth. Nevertheless, we should remember that there is still a long way to go and that private activity has yet to become totally self-sustainable, so stimuli will still be required.
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The US economy is at the head of developed economies in reducing debt.
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If the current economic crisis is seen as a crisis of too much debt and that the exit to this crisis involves an arduous deleveraging process, then it can be said that the United States is leading the developed economies. From the peak of March 2009 to the end of 2011, private debt (individuals, financial and non-financial firms) fell from 303.1% to 250.9% of gross domestic product (GDP), a reduction of 52.3% in GDP terms that almost doubles the rise in debt taking place in the public sector since its minimum of June 2007, namely 32.5%.
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Of the three private sectors, the one that must set the pace of debt reduction in the United States is households, which started the crisis relatively more in debt than in other economies. The progress made is evident (see the Box «Household deleveraging: three countries, three stories»). The gross debt of households has gone from 130.0% of disposable income in September 2007 to 112.8% in December 2011. A reduction that is only halfway if we consider a debt of 90.2% of disposable income as normal, the figure at the start of 2000. This sustained improvement, together with the constant improvement in the labour market, seems to be motivating consumers.
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Private consumption reveals a resistant base of growth around 2.0%.
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Although private consumption slowed up at the end of 2011, after having experienced a sharp upswing, the first two months of 2012 show that there is a resistant base that should enable private consumption to grow by around 2.0% throughout this year in real terms. Along these lines, retail sales, without cars or petrol, grew by 3.1% year-on-year in real terms, somewhat above the pace at which it ended 2011, with a figure for January that was revised slightly upwards. Following this pattern, consumption expenditure for the national accounts in January advanced more than revenue, so we expect private consumption to grow by close to 2.0% in the first quarter in annual terms, quite a lot higher than the rate expected just two months ago. Similarly, the Conference Board Consumer Confidence index has started to rise again, clambering up to the level of 70.8 points, a level that is still lower than the historical average (around 100 points) but one which it hadn't reached since February 2008.
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In spite of this improved situation, sustained growth in private consumption of much more than 2.0% looks difficult to achieve. Firstly, the reduction in debt has yet to pass its halfway mark and, in spite of the improvement in consumer credit, a return to the situation before the crisis is not feasible, when private consumption was growing by 3.0% thanks partly to a continued erosion of the savings rate. Secondly, the current situation of the labour market, although it has improved, continues to limit the growth in household income.
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The labour market is improving, with unemployment at 8.3%, but wages will take some time to rise.
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In this respect, although the trend in the labour market is one of the factors that has contributed the most to the improved prospects for the economy as a whole, the benefits that can be expected for 2012 will continue to be modest. After having bottomed out, the labour market's recovery should take place gradually, in three successive stages: firstly, there should be a greater use of the already employed workforce, followed by a rise in new contracts and, thirdly, a recovery in wages.
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February's figures show that the recovery in hours worked and the number of new contracts continue to exceed expectations. 227,000 new jobs were created in February, bringing the total jobs recovered since March 2010 to 3.5 million. Nevertheless, there is still a long way to go before all the jobs lost during the crisis have been made up, namely a further 5.4 million. Similarly, the unemployment rate remained at 8.3% in February, way below the 10.0% of October 2010.
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The recovery in employment is real but more modest that it appears, with three elements that will hinder wage recovery. Firstly, under-employment (workers who are working part-time involuntarily because of little demand) is still high. Although the improvement of the last few months is evident (between September 2011 and February 2012 the number of under-employed went from 9.1 million to 8.0 million), the real level is still much higher than the 4.5 million that might be considered normal. Secondly, the share of long-term unemployed, which are difficult to relocate, is still 42.6%, almost double the previous peak of 1983. Thirdly, the fall in the unemployment rate is due both to job creation and also the reduction in the active workforce, suggesting that the situation is still far from buoyant.
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Improvements in housing are minimal. Prices continue to fall and construction is at a standstill.
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In investment, construction will still be the economy's worst performer, with an excess supply of housing that will continue until well into 2013. One indicator of the slowness of the sector's recovery is that 698,000 new homes in annual terms were started in February, a figure which, although it is above the level of the same period the year before, extends to four months the persistence of a level that is 54.2% lower than the average for the period 1995-2000, prior to the bubble. The best prospects are still in the apartment block sector but prices continue to fall, with the Case-Shiller index for second-hand house prices falling again in December, down 4.0% for the whole of 2011.
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Capital goods investment will remain firm in 2012.
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With an improved tone, capital goods investment should continue growing at more than 5.0% throughout 2012, after its strong progress in 2011. Although the recovery in the manufacturing industry has faded somewhat over the last few months, business prospects for the services sector, which accounts for 86.2% of employment, continue to improve. The manufacturing activity index of the Institute for Supply Management (ISM) fell to 52.4 points, while the index for services continued to rise to 57.3 points, in line with a GDP growth rate higher than the current figure.
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The CPI rises by 2.9% and core inflation moderates by 2.2%.
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In the area of prices, persistently high oil prices could push up the consumer price index (CPI) close to 2.5%. These higher energy prices, which picked up in February, are preventing the expected drop in what is already a moderate inflation rate. While February's CPI held steady at 2.9% year-on-year, the decline is starting to be felt in the core CPI, which excludes energy and food prices, up 2.2% year-on-year. A minimal moderation that becomes more evident when we take into account the price variations between January and February. The sectors pulling core inflation down the most were clothing, rent attributed to home owners and leisure.
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Expensive oil stops the trade deficit from correcting and deducts growth for the economy as a whole.
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The impact of higher oil prices is also being felt by the foreign sector, contributing to the net loss in growth entailed for the US economy. The trade balance for goods and services in January showed a deficit of 52.6 billion dollars. Of this amount, 29.7 billion were attributable to net imports of oil and its derivatives, which in annual terms represents 2.3% of GDP. Crude prices remaining at the current 125 dollars per barrel therefore involves a loss of around 0.5% in GDP terms compared with a hypothetical scenario in which oil prices fall to 100 dollars per barrel. This explains the interest being shown by Obama's administration in bringing down oil prices, applying measures such as releasing their own reserves. With regard to the balance excluding oil, of note is the good performance by exports, on the rise after several months of stagnation; a significant fact considering the general slowdown in world demand and particularly the weakness of its European trading partners.
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Japan
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Japan: everything depends on industrial recovery
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Japan expects its economy to recover in the first quarter of 2012.
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GDP ended 2011 with a drop in the fourth quarter and with a reconstruction effort that is encountering more difficulties than expected. Exporters have been hit hard by energy costs, aggravated by the effects of Thailand's floods, where Japanese firms had invested to ensure their supplies. This has eroded the current account surplus that, should it continue, would entail the need for external financing, making it more difficult to sustain the expansionary fiscal policies planned for 2012.
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Industrial production stands at 2.8% below the level of February 2011.
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However, the outlook for the first quarter has improved precisely because of the good performance by manufacturing exporters, the traditional strength of Japan's economy. February's industrial production posted a cumulative increase of 5.8% since the start of the year, while the machinery orders of exporters, a leading indicator for capital goods investment, also picked up. The only blot on this improved landscape is the important electronics and telecom sector which continued to decline, at a level that is still 18.0% below that of February 2011, the month prior to March's tragedy, while the general industrial production index still needs to improve just 2.8% to recover fully.
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China modifies its growth target from 8.0% to 7.5%, with a contribution from consumption that needs to increase.
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Looking in more detail at the upward trends of the first quarter, February's trade balance was better than expected thanks to the good performance by exports, which advanced 2.9% compared with January and reduce the likelihood of a current account deficit throughout 2012.
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China
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China: abandoning the eight
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In March, the world's second economy lowered its annual growth target for the first time in eight years. Prime Minister Wen Jiabao announced that, as from now, the Beijing government's target would go from 8.0% to 7.5%. This change entails the explicit proposal to refocus growth in investment and exports towards private consumption, which in China accounts for just one third of GDP and whose growth rates are usually lower than those of investment.
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The main scenario for 2012 is still one of a soft landing.
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Our main scenario continues to be a soft landing for the economy, with growth that should come close to 8.0% for the whole of 2012. However, the risk of insufficient growth seems more likely than that of an increase in inflationary tensions. Although the trend in prices in the medium and long term points upwards, since China's demographic must continue to push up labour costs, inflationary tensions should not be a problem in 2012, especially when the latest figures confirm that the recovery in inflation in January was due to higher food prices because of the celebrations for the Chinese New Year.
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Inflation moderates to 3.2%.
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In this respect, February's CPI was 3.2% year-on-year, while the CPI for food, which accounts for a third of the total in China, went from rising 10.5% in January to 6.2% in February. The greatest inflationary risk in the short term lies in energy prices, which are government regulated in China. In March, the authorities raised fuel prices by 6% given the losses that the narrow margins were causing for Chinese refineries. However, the rise in the core CPI continued to be moderate, up 1.6% year-on-year in January.
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Whereas the battle against inflation that began mid-2011 seems to have borne fruit, lower growth than expected is the greatest risk in the short term. Awaiting the publication of the industrial production figures for the first two months of 2012, which will show the extent of the robustness in industrial activity, electricity production picked up in February after its hiatus for the New Year celebrations. Similarly, house prices continued to fall in most of the country's cities in February, indicating that this sector, which represents 13% of GDP, continues to slow up. However, the soft landing is feasible as there is still a lot of room for stimulus policies, even more so if inflation is confirmed to be under control. The cash reserve ratio, in spite of the previous month's fall, is still at a high 20.5%, enabling further reductions, while government debt, even including that of local corporations, remains at a moderate level.
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Rapid slowdown in the real estate sector and exports.
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For its part, the trade balance started to fall again. Calendar effects meant that, in February, there was a trade deficit of 31.5 billion dollars, the largest in China's recent history. Although this situation might correct itself in March, the cumulative surplus over the last twelve months is 154.5 billion dollars, very far from the situation prior to the financial crisis. In particular, while the trade surplus accounted for 5.7% of GDP on average in the period 2006-2008, the estimate for the twelve months up to February 2012 remains at 2.0%, suggesting that private consumption should not delay too long in taking over from exports and investment, if growth is to be bolstered.
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Household deleveraging: three countries, three stories
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On the verge of 5 years since the subprime bubble sparked off the worst financial debacle in decades, households on both sides of the Atlantic are still attempting to reduce their excessive debt. This adjustment process promises to be long and arduous; even more so, if possible, in those countries that have yet to consolidate their recovery. Nonetheless, the slump in the economic cycle is not the only reason why the pace of household deleveraging varies substantially from country to country. The aim of this box is, precisely, to establish which factors lie behind this discordance and how this affects each country's growth prospects by comparing the United States, United Kingdom and Spain, three economies that share the regrettable need to overcome the ravages of a burst credit bubble.
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During the long boom between the dot.com crisis and the subprime crisis, US, British and Spanish families took advantage of the large amount of low-cost liquidity to spend much more than they earned by considerably increasing their use of credit. Between 2001 and 2007, the level of household debt rose by 80% in the United States; by 87% in the United Kingdom and, in Spain, by 168%; almost doubling in the two Anglo-Saxon countries and tripling in Spain. Although the statistics in absolute terms are revealing in themselves, when considering their sustainability it is more appropriate to measure the indebtedness of households in relation to their earning capacity. So, during this intercrisis period, the household leverage ratio in the United States, measured as the ratio of debt to gross disposable income (GDI), rose by 30 percentage points (p.p.). In the United Kingdom this leverage ratio rose by 52 p.p. and, in Spain, by 58 p.p.
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The outbreak of the financial crisis in 2007 and its deterioration in 2008 with the Lehman Brothers bankruptcy marked the start of a deleveraging process that is slowly making progress in each of the economies analyzed. However, the statistics reveal perceptibly different adjustment rates between countries in this case as well. In the United States, the ratio of debt to GDI has fallen by 17 percentage points compared with its peak at the end of 2007. In the United Kingdom, the cumulative adjustment is 14 percentage points, also since its peak. In Spain, however, it has only adjusted by 7 p.p., in spite of having risen much more than in the United States or the United Kingdom over the eight years preceding the bursting of the bubble (see the above graph). According to a recent study by McKinsey,(1) which is based on the Nordic experience in the 1990s, US households should have carried out almost half their deleveraging while both the United Kingdom and especially Spain would be lagging behind.
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So the question is why? Why is the deleveraging process progressing more slowly in the United Kingdom and why has the adjustment made in Spain been much less than in the other two countries? Before going into details regarding the causes, we should look at the forces that lie behind this correction and, to this end, we should break down these differences in the gross debt-to-income ratio into two parts: the variation due to the change in outstanding debt, the ratio's numerator, and that caused by the rise in disposable income, its denominator (see the table below). In the case of the United States and the United Kingdom, most of the reduction in the debt ratio during the deleveraging phase can be attributed to improved GDI. In both cases, household disposable income has grown by more than 10% in cumulative terms since the peak of indebtedness in 2007-2008. In clear contrast, Spain's GDI has only risen by 2% since 2008, which cannot account for more than three percentage points of its lag in the debt ratio.
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Employment trends are key to explaining the differences in terms of disposable income: while employment has fallen by around 2% since 2007 in the United Kingdom and by 4% in the United States, Spain has seen a 13% drop. However, the trend in wages in the three economies has not been so discordant (+7% in the United Kingdom, +9% in Spain and +10% in the United States). With regard to the numerator's contribution; i.e. the outstanding debt, in the United States and Spain this has fallen by 4% and 3% from the leveraging peaks respectively, while in the United Kingdom it has even risen by 2%. The burden of deleveraging in Spanish households has therefore fallen especially on adjusting the numerator and, in particular, on consumer credit, which has shorter maturities, as mortgage loans are still above the levels of mid-2008.
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(1) See «Debt and deleveraging: Uneven progress on the path to growth», McKinsey Global Institute (2012).
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Given this situation, the United States is bound to be more advanced in its household deleveraging process, both compared with Spain and the United Kingdom. So does this mean that US households have been more disciplined and responsible? Not necessarily. In part, the improved position of US households can be attributed to the higher level of defaults and mortgage foreclosures. These defaults account for almost two thirds of the household debt reduction, or 3 out of the 5 percentage points contributed by this fall to the correction in the leverage ratio.(2) In the United Kingdom and Spain, however, a slower drop in house prices, the reduction in the cost of mortgages, most linked to variable interest rates, and a greater use of refinancing or changes in bank loan conditions have slowed up the number of defaults but will prolong the deleveraging process.
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On the other hand, in the United States deleveraging has been accompanied by a rise in public debt that has helped to more readily sustain the growth in income, thereby facilitating private deleveraging. In contrast, both Spain and the United Kingdom are combining private deleveraging with the consolidation of their national accounts. The simultaneous nature of public and private adjustment is another factor that will delay the completion of deleveraging in both countries, although having a central bank that can provide liquidity will help this process in the United Kingdom.
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There are still several years of hard work ahead. Reducing debt in a recessionary context is very costly. That's why the faster we get back onto the path of growth, the less painful and shorter the process will be. In those economies, such as Spain, which are also forced to speed up the consolidation of their national accounts due to questions of external confidence, such growth can only come from the external sector. It is also fundamental, and even vital, to speed up the programme of structural reforms as well as the debt correction. Without this injection of oxygen, the deleveraging tunnel might end up being too murky and interminable.
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(2) See op. cit. McKinsey Global Institute (2011).
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This box was prepared by Marta Noguer
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International Unit, Research Department, "la Caixa"
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Brazil
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Brazil: halting the slowdown
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The economy grows by 2.7% in 2011, slowing up more than expected.
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Brazil's economy grew by 2.7% in 2011, a little less than most analysts expected and much less than its growth in 2010 (+7.5%). Although a greater impact had been forecast from stimuli implemented since last summer, it has been confirmed that, in the final part of 2011, activity remained relatively weak, which should be put down to the sluggishness of net exports and the fall in stocks. In contrast, domestic expenditure once again proved to be resistant and livened up compared with the previous quarter.
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We expect this upswing in domestic demand to consolidate throughout 2012, supported by a labour market with record low levels of unemployment; a rise in real wages; continuing inflows of capital; solid commodity prices; improved economic sentiment, not only in Brazil but also at a global level; and, of course, the impulse provided by the stimuli, which are fiscal, credit, macroprudential and monetary.
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The Monetary Policy Committee reduces the Selic rate by a further 75 basis points, leaving it at 9.75%.
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In this respect, the disappointing growth figures for the fourth quarter, added to the unexpected decline in industrial production in January and renewed upward pressure on the real, gave the Monetary Policy Committee (COPOM) enough justification to lower interest rates again. Nevertheless, the size of the last cut was quite surprising, namely 75 basis points, leaving the Selic rate at 9.75%. Moreover, the minutes from the last Committee meeting hint at further cuts in the first half of the year, which could take the discount rate down to 9%.
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Measures intensify to slow up the real's appreciation.
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Monetary lassitude, more aggressive than we expected, has forced us to revise our 2012 inflation scenario upwards, placing it at around 5.4% by the end of the year instead of the prior figure of 4.9%. In any case, prices started a gradual correction process in February, once the impact of transport tariff changes had been tempered, as well as other seasonal effects in January. However, this does not stop inflationary pressures from becoming significant again if the return to faster growth is confirmed as 2012 progresses, forcing the Monetary Policy Committee to turn around its interest rate policy, probably early in 2013.
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For the time being, these interest rate reductions will boost efforts to halt the appreciation of the real, once again among the top priorities of Brazil's authorities, in their desire to reactivate an industrial sector that is going through a bad patch. In its last move, it extended the IOF (tax on financial transactions) of 6% to loans financed with foreign capital that mature in less than five years, while in March it had already extended this tax to loans maturing in less than three years.
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Mexico
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Mexico: sticking to the script
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The Mexican economy is increasingly supported by its domestic expenditure.
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Prudential management of macroeconomic policy has helped the Mexican economy to remain solid in spite of the tensions affecting the world economy during the second half of 2011. The relative improvement in the United States' economic prospects has led us to forecast GDP growth of around 3.5%, but we also expect that the fourth quarter's tone of moderation will continue into 2012. Although it's improving, the United States' recovery in activity is still expected to be very gradual, so the volume of Mexico's exports is likely to remain paltry. On the other hand, domestic expenditure continues to provide increasingly solid support. Retail sales surprised by growing 4.4% year-on-year in January, while investment also posted notable growth in November and December.
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Regarding the inflation scenario, this is still relatively benign, remaining within the target range. Moreover, the recent appreciation of the peso is helping to relax pressures on prices a little more. This makes the work of Banxico easier as, for the moment, it still doesn't need to move the official interest rate, which has stood at 4.5% for more than two years.
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Renewed strength in the peso relieves the pressure on prices.
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What will move a little more in this first half of 2012 is the fiscal deficit. We must remember that this is an election year. For the time being, the balance has come down in favour of a change of government as polls point to Enrique Peña, the PRI candidate, as the favourite, ahead of Josefina Vázquez, from the incumbent party. In any case, the challenge facing the new President will be to boost the potential growth of an economy that still needs an ambitious programme of structural reforms to tackle historical obstacles, such as the tax revenue's excessive dependence on oil, and significant inefficiencies in the educational system.
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Commodities
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Oil calls a halt, for the moment
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Oil remains at 122.8 dollars, calling a halt to its upward trend.
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Oil halted its upward trend and kept its price almost the same between 22 February and 22 March, falling by just 0.2% to 122.80 dollars per barrel (Brent quality, for one-month deliveries), 14.7% higher than the start of the year, equalling the rise for 2011 as a whole and 5.8% above the level of a year ago, when the Libyan crisis had reached its peak.
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Saudi Arabia's decision to increase crude production to offset the fall in Iranian exports, backed by the release of US and UK reserves, is the main reason why prices have momentarily stabilized, highlighting the widespread interest in preventing rising oil prices from aggravating the slowdown in the world's aggregate demand.
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Price rises are stalling but it's too soon to speak of any change in trend.
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The rest of commodities performed unevenly, interrupting the upward trends of the start of the year. Such small decreases, however, make it difficult to speak of any change in trend. The CRB index grew by an imperceptible 0.2% between 22 February and 22 March but falls predominated among metals and foods, with the exception of iron, steel and rice. Among metals, of note were the falls in gold and nickel, namely 6.7% and the 8.2% respectively, while among foods the 10.4% fall in coffee prices was particularly significant.
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