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Euro area
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The euro area: moving away from the precipice
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Greece and the new growth forecasts for the EU attract economic and political interest.
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In March, there were two significant changes in Greece's situation. Firstly, the exchange has been carried out of its sovereign debt in the hands of private creditors. The outcome of this write-down entails a reduction of around 105 billion euros in the Greek republic's stock of debt, leaving it at 245 billion euros, 113.9% of its gross domestic product (GDP).
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This was precisely one of the basic requirements demanded by the troika to greenlight the second financial bail-out plan. This reduction in Greece's debt is key to reaching a debt stock level below 120.5% of GDP in 2020, a level considered to be crucial for guaranteeing the country's financial viability. The second vital factor has been the approval of a second bail-out plan by the euro area Finance Ministers and the International Monetary Fund.
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The troika approves the second financial bail-out plan for Greece.
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In the European Union (EU), the political scenario will see two elections and a referendum over the next few months. Firstly, the French presidential elections of 2012, whose first round will take place on 22 April and the second round, between the two candidates with the most votes, on 6 May 2012. Secondly, the Greek legislative elections will probably take place in April. Lastly, Ireland will hold a referendum to decide whether to join the fiscal pact that 25 European Union countries, all excepting the United Kingdom and the Czech Republic, agreed to on 30 January and which is currently being ratified by each member state.
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These decisions, which the citizens of these countries must take, are key points on the near horizon of the EU and could lead to an increase in uncertainty depending on how they are resolved. This background noise is occurring within a context of economic slowdown in the euro area, as highlighted by the breakdown in GDP data for the fourth quarter. The 0.7% year-on-year growth in GDP hides great disparity. While some countries such as Italy and the Netherlands have negative year-on-year growth of 0.5% and 0.7% respectively, the German engine has maintained year-on-year growth of 2%.
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The political agenda is centred on the elections to be held in France and Greece.
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However, one of the components with the most worrying trend has been private consumption, with a negative year-on-year growth of 0.6%. Within such an environment of political and economic uncertainty, households decided to reduce their spending. This decision also resulted in lower growth in private investment, affected by sluggish demand and the difficulties in obtaining credit to finance business opportunities, while member states continue with their fiscal consolidation, leading to a 0.3% drop year-on-in public expenditure for the euro area as a whole. Fortunately, net exports offset this as the fall in imports was more pronounced than the slowdown in exports, with exports contributing three tenths of a percentage point to GDP growth in the fourth quarter.
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Leading indicators point to the economic deterioration probably slowing up.
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The data show that last year started with strong growth but this dwindled as time went on. The profile this year could be exactly the opposite; i.e. starting with a very weak level of economic activity but ending the year somewhat more strongly. Most leading indicators published to date indicate that the sharp economic deterioration in the last quarter last year should slow up.
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From the point of view of demand, consumer confidence has improved a little since the minimum of -21.3 points recorded in December. This advance has not been substantial partly because it is limited by the weak labour market. In January, the euro area's unemployment rate stood at 10.7%, two tenths of a percentage point above the average figure for the last quarter of 2011. In January, 185,000 people lost their job and, in total, there are 16.9 million people unemployed. This is a delayed indicator of economic activity but it is important to note that such a high figure has not been seen since October 1997. Although it's true that this figure masks a great disparity between countries, from Spain's unemployment rate of 23.3% to 4% in Austria.
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The foreign sector remains the mainstay of the recovery.
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The stabilization of the consumer confidence index has been translated into a month-on-month rise in January of 0.3% in retail and consumer goods, raising year-on-year growth from a contraction of 1.1% to zero growth. This figure is a good example of this slight improvement, as retail sales had recorded four consecutive month-on-month falls in the previous months.
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The foreign sector is still the mainstay of the recovery. January's trade deficit fell to 7.6 billion euros, an improvement on December of 1.5 billion euros. And this is in spite of rising oil prices making crude imports considerably more expensive.
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From the point of view of supply, January's industrial production shrank by 1.2% but less than the drop recorded in December of 1.8%. And an additional recovery can be glimpsed by way of the tentative improvement in business confidence indices in the euro area. This could reinforce the idea that the trend of economic decline has touched bottom. The industrial confidence index has improved from January's -7.0 points to -5.8 points in February. The index of economic sentiment, which represents an aggregate of business and consumer confidence, rose by one point compared with the previous month, up to 94.4 points.
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Rising oil prices stop inflation from falling.
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As we already mentioned in our last Monthly Report, one of the latent risks to economic recovery is the price of oil. For the moment, its rise has been keeping inflation at 2.7% since December while core inflation, excluding the most volatile elements of food and energy, has remained at 1.5% year-on-year.
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Breaking down the inflation figures, we find that the most inflationary components for February compared with the previous month were petrol, transportation, electricity and tobacco.
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These data have forced us to revise our inflation forecast for this year from 1.7% to 2.0%. This is slightly lower than the revision made by the European Central Bank, raising its forecast from 2.0% to 2.4%. The reserve bank attributes this rise to oil prices and the expected hikes in indirect taxes in some countries. In its note it explains that it has taken oil futures into account when calculating its oil price forecast. Our view of oil prices is less pessimistic, as we believe that it will not reach such a high level. The declaration made by Saudi Arabia's Petroleum Minister, Ali Naimi, stating that the price of black gold was not justified and announcing that his country would increase its production by up to 25%, if necessary, to push down the price, reinforces this idea. Evidently, oil producing countries want to maximize their revenue but they don't want to cause a world recession.
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Although out estimate is more optimistic, this is no way reduces the concern shown by most central banks, including the European Central Bank, regarding the latent risk of further rises in inflation and the negative effect this would have on the disposable income of households, which we fully share.
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Fiscal adjustment and private sector deleveraging impede a strong economic recovery.
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In summary, European Union has successfully tackled a great obstacle in Greece, although the challenges facing the republic are still considerable. However, the debt swap has avoided a disorderly default, which would have had more serious destabilizing consequences, via contagion, for other EU member States. Moreover, economic indicators point to stabilization in the economic deterioration seen over the last few quarters. Nevertheless, the fiscal adjustment, which in some countries is intense, combined with private sector deleveraging should prevent economic activity from becoming dynamic. In short, whereas a few months ago economic agents were stricken with pessimism, it seems that this mood must have been altered somewhat by the latest economic figures, although this has not eliminated the fragile economic situation in the euro area.
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Bank deleveraging in Europe: repercussions in the emerging world?
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We tend to analyze the euro area's financial crisis from what we might call a Eurocentric perspective. We are concerned, for example, that the bank deleveraging occurring might hinder the Old Continent's growth by restricting credit. Although understandable, this view eclipses others resulting from the process. In particular, little is mentioned in the debate about the possible impact of the euro area's bank deleveraging on the financing of other regions in the world, in particular on the emerging economies. However, this is a relevant question as two issues are involved here that are not always taken into account.
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The first, the great importance of foreign credit in financing emerging economies. According to data from the Bank for International Settlements (BIS), between the first quarter of 2005 and the third of 2011, the last quarter with data available, foreign assets with regard to emerging economies in the hands of banks practically tripled, currently reaching 4.8 trillion dollars, an amount approximately equivalent to 25% of the emerging economies' national credit and 20% of their GDP. This is also a notably dynamic process as, in spite of the fact that four out of these seven years have been dominated by the global financial crisis, foreign credit has managed to grow by an average of 5% quarter-on-quarter. This dynamic context lessens the potential impact of the fall in external bank assets recorded in the third quarter of 2011 and the fact that this will probably continue in the fourth quarter.
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A second issue, not always remembered, is the dominant role of European banks in this external financing. As can be seen in the graph below, approximately 44% of international bank financing comes from banks in the single currency area, followed by British banks in terms of importance (19% of the total). US banks would have a slightly lower share, in the order of 15% of the total. To complete this view, we should also mention the geographical distribution of European international bank financing. As might be expected, this is especially prevalent in emerging Europe (80% of external assets are in the hands of euro area banks) and, as a distant second, in Latin America (50%). Its importance is slightly less in emerging Asia and Africa.
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Taking both facts together, namely that of the growing importance of foreign bank credit for emerging economies and the fact that Europe dominates this kind of financing (especially in emerging Europe), the concern expressed by some analysts is easy to comprehend: if European banks opted to reduce their leveraging in terms of their emerging counterparts in order to meet the new capitalization requirements, might credit suddenly flounder for the part of the globe that, so far, has managed to preserve growth?(1)
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The answer, today, is that there are two significant factors that might help to reduce this risk we have just mentioned: i) the capacity of other zones to at least partly replace the role played by the euro area in emerging external financing, and ii) the fact that the true vulnerability of emerging Europe to handle the effects of a hypothetical deleveraging is actually more intricate.
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When we analyze the trend in external credit to the emerging economies as a whole, we can see that the role of external financing coming from the euro area is being replaced by financing through banks in the United States, the United Kingdom and the rest of the world. In quantitative terms, the euro area's share has fallen by 10 percentage points since the fourth quarter of 2008 (when it was at its peak), with the US and British share increasing by four percentage points and that of other countries by the remaining two points. All this, as has been mentioned above, within a context of growth in the overall volume of external assets related to the emerging economies. Various analysts agree that there are reasons to believe the banks of China and the United Kingdom might continue to play a compensatory role in the future, should European deleveraging be incredibly acute, especially in the critical region of emerging Asia.
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(1) A prior but distinct debate to the one that concerns us here is related to the scope this deleveraging process will ultimately have. As pointed out by a recent BIS study, this is an open discussion, with differing deleveraging calculations that range from 0.5 trillion dollars to 3 trillion dollars for the coming years; i.e. a figure of between 1% and 5% of the EU's total bank assets. See, in particular, Peter, G., M. Drehmann and V. Sushko, (2012), «European bank funding and deleveraging», BIS. Quarterly Review, March, and Morgan Stanley, (2011), «European Banks. What are the Risks of 1.5-2.5tr Deleveraging».
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With regard to the second of the factors mentioned above, the one related to emerging Europe, a recent BIS study suggests that this risk is less due to the composition and maturities of external bank credit.(2) So, although the BIS states that emerging Europe has weaknesses given the high share of foreign banks in the countries' total credit (approximately 50% of the total credit is held by euro area banks, with slightly higher rates in countries such as Hungary and Romania), the predominance of credit to their subsidiaries (compared with credit to firms, the public sector, etc.) partially limits Europe's financial vulnerability. This is due to the fact that the first of these types tends to be less volatile than the second, providing greater protection against any sudden changes in financial orientation on the part of foreign banks.
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A second aspect related to the composition refers to the type of cross-border securities in question. If these are tradable debt securities (as opposed to non-tradable loans), the ease with which foreign creditors can get hold of their assets is greater (and, therefore, so is the vulnerability of the emerging economy in question). In accordance with the BIS figures, only 10% of the international assets held by euro area banks are in the form of tradable securities. Lastly, with regard to the maturity structure, this also helps to reduce the risk of any sudden reversal in external financing since, within the external assets portfolio of euro area banks, those whose counterparty is emerging Europe tend to be long-term (maturities longer than one year, accounting for two thirds of the total, compared with, for example, 50% from emerging Asia).
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In short, we'll have to wait a while to be able to give a definitive judgement on this issue. Nonetheless, from the previous discussion we can conclude that the importance of European banks in the external financing of emerging countries, particularly in emerging Europe, means that attention should be paid to how Europe's deleveraging is progressing, albeit with the proviso that the international financial system could partly replace the role of European banks, using financing from banks in other zones and other types of financing, such as bonds, and also by reducing the concentration of risk in emerging Europe by means of the type and maturities of financing.
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(2) See Avdjiev, S., (2011), «Evaluating the potential impact of deleveraging by euro area banks on emerging economies», BIS Quarterly Review, December.
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This box was prepared by Àlex Ruiz
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International Unit, Research Department, "la Caixa"
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Germany
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A modest tone for the German economy at the start of 2012
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Some signs of weakness mar the largely favourable outlook for the German economy.
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The economic indicators available point, on the whole, to a moderate expansion in Germany's economy in the first quarter of the year. The recovery underway would therefore avoid a technical recession after the slight decline recorded in the fourth quarter of 2011. However, it should be noted that some signs of weakness have appeared which can be partly put down to the high levels reached by oil prices.
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Germany's industrial production grows more than expected in January but the short-term outlook is not encouraging.
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Concerning demand, consumption appears lacklustre in the first few months of the year. Both retail sales and the industrial production of consumer goods, as well as passenger car registrations recorded drops year-on-year in January, although automobile sales stabilized in February. However, consumer confidence improved in the first two months, standing slightly above its historic average. Consumption should therefore continue to rise, boosted by the expectations of an increase in household disposable income.
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With regard to investment, the outlook is quite favourable, supported by forecasts of growth in demand and by low interest rates. With regard to capital goods, investment demand will come both from replacement and also the enlargement of production capacity. In January, the industrial production of capital goods posted a strong trend and its annual rate of change reached 7.1%.
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Foreign trade also started the year well. Exports of goods rose by 2.3% compared to the previous month, seasonally adjusted, and 9.3% compared with the same month in 2011. For their part, imports recorded a 2.4% rise month- on-month and a year-on-year increase of 6.3%. In this way, in January the trade surplus widened to 13.1 billion euros, up 29.7% on twelve months before.
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From the point of view of supply, industrial production provided a pleasant surprise in the first month of 2012 by posting a month-on-month increase of 1.4%. However, the gradual fall in industrial orders suggests that the secondary sector will lose steam in the next period. This weakness might be offset by construction, which grew by 4.3% in January compared with the previous month. With regard to services, in January hotels and restaurants posted a year-on-year increase of 0.8% in their real turnover. In the first two months, tertiary sector confidence picked up compared with the last quarter of 2011, but scarcely reached its normal level.
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The labour market, which usually lags behind the overall trend, continued to create jobs in January. However, in February the BA-X employment demand indicator fell to some extent, although still at a high level. The upward pressures of labour costs might have played a part in this. For its part, inflation rose by two tenths of a percentage point in February to 2.3% year-on-year, boosted by energy prices. It therefore interrupted its downward spiral started in October last year. Inflation is likely to fall although an unexpected rise in the price of crude cannot be ruled out.
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The German government approves a programme of reforms to stay in shape.
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Within this mixed scenario, we have kept our annual growth forecast for the German economy in 2012 at 0.5%. This modest growth contrasts with the more unfavourable rates expected for the rest of the largest economies in the euro area and is based on the competitiveness of the German economy. Nonetheless, if the situation of the rest of Europe's economies worsened, Germany would also be affected, in spite of its expansion being based on domestic demand.
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Given this situation, at the start of spring the German government approved a programme of reforms for 2012. This includes the measures at a European level of the Euro Plus Pact. Moreover, in order to strengthen economic performance, the financial conditions for venture capital will be improved and qualified immigration will be easier, among other measures.
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France
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The French economy has a weak pulse
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Indicators point to the French economy stagnating in the first quarter.
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Problems of competitiveness, the delicate situation of some of its trading partners and the austerity measures implemented to redress its public accounts are hindering the French economy's performance. In the first few months of 2012, indicators point to economic stagnation in the first quarter, which represents a slowdown after the 0.2% quarter-on-quarter growth posted in the period October-December 2011.
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For the year as a whole, we have not altered our previous forecast of an annual increase of 0.1%, as the above-mentioned factors are still going to persist. However, a pleasant surprise cannot be ruled out, if the global macroeconomic environment improves more than expected. Nevertheless, there are also downward risks, such as rising commodity prices or a worsening of the sovereign debt crisis in the peripheral countries of the euro area.
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France's external current account deficit widens in January.
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In any case, household consumption has been lacklustre at start of the year. The consumption of goods fell by 0.4% in January compared to the previous month, due particularly to the drop in cars. In February, passenger car sales reported a year-on-year decrease of 24.4%, although this rate has been affected by the end of purchase subsidies a year earlier. In the same month, retail sales dropped by 1.8% month-on-month. Consumer confidence is at a relatively low level because of concerns regarding rising unemployment and inflation. The unemployment rate reached 10.0% in January, 4 tenths of a percentage point more than twelve months before, and inflation held steady at 2.3% in February, 0.6 percentage points more than in February 2011, pressurized by energy and fresh food prices due to the month's bad weather. With regard to capital goods investment, the low level of production capacity utilization is failing to boost this in spite of low interest rates.
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With regard to the foreign sector, in January the current account deficit increased to 4.2 billion euros compared with 2.8 billion in December, seasonally adjusted. This was primarily due to the smaller surplus in services and, to a lesser extent, that of investment income. In any case, it highlights the fact that the French economy has competitiveness problems.
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A bill to reduce corporate administrative charges in France.
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A weak tone can also be observed in terms of supply. Industrial production grew by 0.3% in January compared with December, but less than expected. In February, surveys pointed to a slight decline due to cars and metallurgy. However, the normal level of orders suggests a slight expansion in the short term. On the other hand, new homes started rose by 2.6% in January compared with the previous month, seasonally adjusted. With regard to services, these stabilized in February, boosted partly by computing activities, offsetting a change in direction in hotels and restaurants.
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The risk premium measured by the spread with German sovereign debt at ten years continued to improve, reaching 91 basis points by the middle of the fourth week in March, half the level recorded in November 2011. Similarly, in January corporate credit maintained an annual growth rate of 5.2%. On the other hand, the number of business insolvencies continued to fall, albeit losing steam in January, posting a year-on-year change rate of 0.7%. The underlying dynamism of the French economy could also be seen in the 4.3% rise year-on-year in start-ups in the period December-February.
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To tackle the above-mentioned problems of competitiveness, at the end of February the French parliament adopted the bill for legal simplification and the reduction of administrative charges. The aim is to reduce the cost to firms of administrative forms, among other measures.
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Italy
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Italy: timid signs of improvement, given the seriousness of the situation
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Italian consumer confidence picks up slightly in February but is still at a very low level.
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The revision of the National Accounts system's figures for the fourth quarter of 2011 for the third largest economy in the euro area confirmed that it had entered recession. However, the year-on-year drop in the last quarter was revised upwards by one tenth of a percentage point to -0.4%. The detailed figures showed that all the main components of domestic demand deducted from the quarterly growth in GDP, while the foreign sector contributed 0.7 percentage points. For the year as a whole, the GDP adjusted for calendar effects rose by 0.5% compared with a 2010.
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The Italian government undertakes labour reforms to make the job market more flexible.
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Some signs of improvement have appeared in the last month. The index of economic sentiment posted a slight rise after two consecutive drops. However, it was still significantly below its historical average. Although the programme of reforms implemented by the new government will make greater growth possible in the long term, in the short term the Italian economy will continue to suffer from the effects of the necessary austerity measures and its cumulative loss of competitiveness. We therefore keep to our forecast of an annual decrease in GDP of 1.5% for this year.
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Concerning demand, retail sales recorded a 0.7% growth month-on-month in January, seasonally adjusted, after two months of falls. However, in February vehicle registrations sharpened their year-on-year decline, posting a change of -18.9%. Consumer confidence picked up slightly in February but was at a very depressed level, affected by the expected contraction in disposable income and by the unfavourable trend in the labour market. The unemployment rate rose to 9.2% in January, 0.3 percentage points more than in December, and reached its highest level for the last few years. Inflation didn't cheer up consumers in February either, rising slightly to 3.3%.
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With regard to the external situation, in January exports of goods fell by 2.5%, seasonally adjusted, while imports only dropped by 0.5%. The trade deficit totalled 4.35 billion euros, although the non-energy balance was positive, totalling 1.8 billion. However, compared with January 2010, the trend was better as exports rose by 4.3%, while purchases abroad fell by 2.6%, involving a correction of the deficit, albeit insufficient.
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The Chancellor of the Exchequer reviews taxation in order to boost private investment.
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From the point of view of supply, industrial production continued its decline in the first month of the year, 2.5% down on December, and recorded a year-on-year drop of 5.0%. The short-term outlook is not good, judging by January's 7.4% contraction month-on-month and 5.6% contraction year-on- year in orders. Things were no better for construction at the start of the year, when its production fell by 7.8% month-on-month, affected by the real estate crisis. With regard to services, their confidence index picked up slightly in February, albeit still at a low level.
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On the other hand, the risk premium has narrowed slightly over the last period. The spread with German ten-year sovereign bonds, which had recorded a peak of 550 basis points last November, fell to around 300 basis points at the start of spring. The yield on Italian long-term sovereign bonds managed to fall below 5% by mid-March for the first time since August 2011.
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This improvement is partly attributable to the support provided by the European Central Bank but the programmes of reforms underway may also have helped, as well as the redressing of the public deficit, which stood at 3.9% of GDP in 2011, compared with 4.6% in 2010. In this respect, after the packages of «Salva Italia», «Cresci Italia» and «Semplifica Italia» entered into force, towards the end of March the Italian government passed a bill to extensively reform the labour legislation, aiming to introduce more flexibility and efficiency in the labour market.
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United Kingdom
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The United Kingdom: revising taxes to boost the economy
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The fiscal consolidation efforts carried out by the United Kingdom over the last year have taken their toll with a sharp fall in economic activity, as shown by the growth in gross domestic product in 2011, which was just 0.8%. Moreover, the economic outlook is still not very optimistic.
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Given this situation, the UK Chancellor of the Exchequer, George Osborne, has announced a reduction in the rate paid by the highest income bracket and also in corporation tax, whose aim is to boost private investment. The rate for incomes over 150,000 pounds per year is likely to decrease from 50% al 45%, as from April 2013. Although the more significant change in the short term is the downward revision of corporation tax, which will decrease from 26% to 24% as from April this year and is expected to stand at 22% in 2014.
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Inflation continues to fall in the United Kingdom.
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George Osborne believes this will make the United Kingdom one of the most competitive countries in terms of attracting firms. However, he repeated his intention to offset these tax cuts to maintain the fiscal austerity plan. For this reason, he has decided to raise the taxes levied when buying a home valued at more than 2 million pounds sterling, by 5%. On the other hand, to stop the practice of avoiding stamp duty when buying a house through a company, he has passed a new 15% tax for such cases. To date, the stamp duty had been scaled, its highest level being 5% for houses worth more than one million pounds.
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The Chancellor will also reinforce measures to combat tax evasion. And he has raised the tax levied on the assets of banks operating in the United Kingdom. Indirect taxes have also been raised, such as the tax on tobacco, up by 37 pence per box of cigarettes. In this way the Chancellor hopes to prevent the country losing its top credit rating, which is currently AAA. The target is to eliminate the fiscal deficit by the 2017 tax year, which is currently more than 8% of gross domestic product. And the challenge during the tax year beginning in April 2012 is huge, as the goal is to reduce the fiscal deficit to 5.9% of GDP by the end of March 2013.
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This announcement was made within a context of lethargic aggregate demand. The weak labour market affected retail sales in February, down 0.8% month-on-month, the largest fall in the last nine months, and the figure for January has also been revised to 0.3% from 0.9%.
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On the external side, the United Kingdom's trade balance in January posted a deficit of 7.5 billion pounds. This negative balance has deteriorated since December, although less than the months of October and November, so that, should it continue, the foreign sector would contribute positively to growth in the first quarter. Of note is the good performance by exports to countries outside the European Union, especially cars and oil, due to price rises.
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In terms of supply, industrial production continues to deteriorate, posting a 0.4% drop month-on-month in January, while the year-on-year figure shows a contraction of 3.8%. Most items show contraction, almost without exception. Curiously, this figure contrasts with a slight improvement in the country's business sentiment surveys.
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Financial tension has eased in emerging Europe.
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Inflation continues its downward trend, as shown by the figure for February with year-on-year growth of 3.4%, two tenths of a percentage point less than the previous month, although the rise in oil prices has slowed up February's decrease. Nonetheless, this is still the lowest level since November 2010 and reflects a significant fall since the 5.2% recorded in September last year. However, the Bank of England itself, in the minutes published for its monetary policy meeting in March, and regarding the preceding meeting, stressed its greater concern for inflation and its possible effect on future wage pressures. It even announced that its 1.8% forecast for the end of 2012 does not totally reflect the risk supposed by the rise in oil prices seen over the last few months.
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Emerging Europe
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Emerging Europe: a recovery in the making
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If we are to highlight the sources of uncertainty that have presided over the recent situation in emerging Europe, we should mention the financial repercussions of the euro area's sovereign debt crisis, Hungary's situation and the extent of the weak phase in activity. The financial tension front is apparently starting to be redressed, as shown by the appreciable relaxation in the risk premium of the sovereign bonds in emerging Europe and the successful sovereign debt issuances in foreign currency in Poland and Romania during the first quarter of the year. This is a change induced by developments outside the region but with important positive consequences, given these economies' dependence on external financing.
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Hungary's situation is still one of waiting, with the government forced to make a move in terms of economic policy.
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With regard to Hungary, public attention has been notoriously attracted by the decision of the European Union not to pay a third of the cohesion fund in 2013 if additional measures are not announced to cut structural expenditure before June. In spite of the media coverage, this is another step forward in the so-called excessive deficit procedure and had already been predicted by most analysts. The fundamental element that still dominates economic discussion concerns the need for financial aid from the International Monetary Fund (IMF) and the EU, and the likelihood of this happening soon. There is little news in this area but both the improvement in the international financial environment and the expectations that external credit will end up arriving have helped to reduce the interest rate charged on the government's debt.
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With the financial storms temporarily abated and Hungary waiting expectantly, in the last few weeks attention has been focused on the strictly macroeconomic front. In particular, the main question is whether the slowdown in the economy has touched bottom or whether activity is likely to decline even further. Indicators that reflect cyclic nuances more finely, such as economic sentiment, seem to suggest that the first of these scenarios is the one that is actually happening.
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Activity seems to have touched bottom in the last part of 2011.
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In December 2011, the average economic sentiment for the five economies we usually cover in these pages (Poland, Romania, the Czech Republic, Hungary and Slovakia) posted its lowest value since December 2009. It arrived at this level after eight consecutive months of falls. Since then, the index has picked up over the last two months, outlining what looks like becoming a recovering trend. Different elements reinforce this conclusion. Firstly, several leading indicators (such as the one published by the Organization for Economic Cooperation and Development) point to the recovery in activity spreading over the next few months. Nonetheless, this same information shows that the pace of this recovery will be contained, for the time being, and will affect Poland more than the other economies in the region.
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Leading indicators point to the incipient recovery becoming consolidated.
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A second aspect that helps to substantiate the scenario of recovery is that this development goes beyond the strictly temporary and local framework. For the last few weeks, a process of moderate revision has been glimpsed in expectations for global activity. After several months of better than expected activity indicators in key countries such as the United States and Germany, it is starting to be debated whether the contained growth forecasts employed since the end of 2011 are being surpassed, in a positive sense, by reality. For the time being, one example of this perception are the recent statements made by Christine Largarde, Director of the International Monetary Fund, affirming that the situation was slightly better than a few months ago and, even more significantly, that she believed the decisions taken in the last part of 2011 were having an effect. This is a valuable opinion that can be considered as increasingly widespread.
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When are we likely to see this change in scenario confirmed? In emerging Europe, at the level of national accounts, a clear sign will be detected with the growth figures for the second quarter. We should remember that the latest figures available, referring to the fourth quarter of 2011, still showed the region's activity to be in decline. Given that monthly indicators are improving very gradually, in the first quarter we will most likely see positive but minimal quarter-on-quarter growth in most countries.
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Inflation picks up thanks to energy but monetary policy is not going to shift.
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Although this recovery is still at a tentative stage, some people have wondered whether monetary policy is going to change its orientation soon. The answer is necessarily in the negative, as such a shift would be premature. No increase is expected in the official interest rate in 2012 in Poland, the Czech Republic, Slovakia or Romania. In the Hungarian case, there might even be a reduction in the official rate, which could go from the current 7% to levels of 6.5%-6.25% at the end of year, if international financial aid is finally confirmed. This is in spite of the fact that, in February, inflation was above the threshold of 4% year-on-year in most countries due to higher energy tensions (a component that grew in the order of 10% year-on-year, as an average for the region).
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