Economic background

Slowdown in the global economy in 2011 against a background of great uncertainty

In 2011 the global economy suffered a moderate slowdown in a year featuring uncertainty generated by the financial markets, in particular the European sovereign debt markets. Indeed, in 2011 global GDP growth was slightly under 4%, one percentage point below 2010 figure. Although this figure can still be called solid, the slowdown was noticeable with varying intensity in different regions. The greatest contribution has continued to come from emerging countries.

Attention was focused on the progress and setbacks in the solution of the debt crisis in Europe

In 2011 the global economy has followed events in Europe closely, both in terms of progress towards fiscal consolidation and in relation to changes in the structure of governance in the euro zone. The difficulties in generating adequate progress in both areas lie behind the increased contagion of financial turmoil throughout the year. The initial impact hit the European peripheral countries that had been unaffected by bailout programs, such as Italy and Spain, and which required occasional market intervention by the European Central Bank (ECB). Next, financial tension also extended to some segments of the financial system that were affected by recapitalization plans implemented by the European authorities. Finally, doubts about the capacity of governments in the region to solve the crisis meant that even core European countries with sound finances were affected by the tension. None of the successive European summits over 2011 have been able to clear up the uncertainty, although there has been progress towards both fiscal harmonization and governance in the euro zone. Against this background, growth in the European economy as a whole has been weak, just 1.5% (two decimal points below the figure for 2010), and with a major slowdown towards the end of the year, and great variation between countries. Moreover, after an early upward movement, the ECB began to lower rates in response to the increase of risk in the euro zone.

The Spanish economy continues to be immersed in its own adjustments, and growth in 2011 was a few decimal points below 1%, with a trend for a gradual slowdown throughout the year. However, some of these adjustments are progressing at a steady pace. Fiscal consolidation continues, although with some deviation from the 2011 target, and competitiveness is increasing significantly. This has been reflected in a considerable increase in exports.

The United States shows greater than expected cyclical weakness, with significant challenges in fiscal policy

The United States surprised with data that suggested a recovery that quickly ran out of steam, although towards the end of 2011 this trend partially reversed. Growth slowed in 2011 to around 1.7% (the figure for 2010 was 3%). Fiscal policy has also been key over the year, given the difficulties experienced by the authorities to prepare a plan that balanced the need to support economic activity in the short term with a credible process of long-term consolidation.

Despite the slowdown in advanced economies, emerging economies continue to grow solidly, but towards more sustainable levels, particularly supported by the strength of domestic demand. However, the increase of global risk aversion is also affecting emerging markets. This has been reflected in lower capital inflows, falls in equity markets and foreign-exchange tension.

Emerging economies are moving towards a soft landing, despite the global uncertainty

In this context, economic activity in Mexico is showing some positive signs, but with a trend towards moderation, so that growth in 2011 is estimated to be a decimal point under 4%. At the same time, average inflation remained at around 3.4%, allowing the Bank of Mexico to send more dovish monetary policy messages. The high degree of economic openness of the Mexican economy means that global slowdown has had a local effect, but mainly offset by improved competitiveness in some manufacturing sectors and positive financing conditions.

In South America, the global slowdown results in a moderation of the growth rate towards the end of 2011, with an increase in risk premiums, falling commodity prices and equity markets and above all, a certain weakness in many of the region’s currencies. This meant that most central banks in the area intervened to moderate (or even reverse) currency depreciation. Even so, taking the year as a whole into consideration, economic growth was sound, at around 4.4%, nearly two points below the figure in 2010.

GDP growth in China moderated following the efforts made to avoid economy overheating. Domestic demand and output remain strong and the pace of the slowdown has been in line with that of a soft landing. However, the problems caused by the external situation have experienced a gradual increase and foreign demand is weaker. Inflation is moderating, although from a very high starting point. The above situation, combined with increasing downside risks, is impacting the implementation of a package of policies to support growth, making China’s economic growth in 2011 to be above 9% (+10.4% in 2010).

Finally, Turkey has been more exposed to periods of financial contagion from Europe, with a lower rate of capital inflows, falls in equity markets and lira depreciation, forcing the Central Bank to intervene. Even so, the economy has grown strongly (8.5% in 2011) and inflation has fallen to 6.7% (8.6% in 2010), although the figure is still high.

In the currency markets, the euro significantly appreciated against the dollar in the first half of the year due to the widening interest rate spread. This was due to the different monetary policy approaches adopted by the ECB (preventive and focused on upward inflation risks) and the Federal Reserve (supporting recovery and boosting growth). However, the deepening European debt crisis weakened the euro’s position in the second half of the year. In sum, the dollar suffered a 4.7% annual average depreciation against the euro. This combination of a strong euro and the relative strength of the emerging currencies against the dollar resulted in a generally unfavorable performance of the currencies with the heaviest weights in BBVA’s financial statements. As a result, there was a negative effect of exchange rates on a year-on-year comparison of the Group’s financial results. Regarding year-end exchange rates, the US dollar appreciated 3.3% against the euro in the last twelve months, same as the Colombian peso (+1.8%), the Peruvian nuevo sol (+7.6%) and the Venezuelan bolivar fuerte (+3.3%). However, the Mexican, the Argentinean and the Chilean peso have depreciated. To sum up, the exchange-rate effect is also negative on the balance sheet and activity. In 2012 the dollar is expected to appreciate against the euro, while emerging currencies will have room for appreciation against the dollar.

Uncertainty drags down the forecasts for 2012

The slow pace of the solution of the European debt crisis implies a downward correction on forecasts for 2012, particularly for developed economies. In addition, the deteriorating external conditions drag down the growth of emerging economies. In a situation of slow recovery from the debt crisis, the global economy could make progress towards a growth rate of around 3.5%, slightly below the figure for 2011. Once more, growth will vary greatly among regions. Emerging Asia will be the engine of the world economy in 2012. In China, GDP will hardly slow a few decimal points, and it will still grow above 8%, while in the rest of emerging Asia it will remain at around 4%. In contrast, Latin America will continue to slow down and its rate of growth will be under 4%. In Turkey the slowdown could be more pronounced, with GDP growing at around 2%. Mexico will still grow at above 3% in 2012. The advanced economies will undoubtedly be the worst hit in the forecasts. The euro zone is expected to post a negative growth of 0.5% as a whole, which will be around -1.3% in Spain. Finally, the United States will grow at 2.3%, only a fraction above the figure for 2011, but equally below this economy’s growth potential. In any event, the risk balance in every economy has a downward bias and the implications of an intensifying European debt crisis could be severe.

Interest rates

(Quarterly and annual averages)

2011 2011 2010 2010

4Q 2Q 1Q
4Q 3Q 2Q 1Q
Official ECB rate 1.25 1.28 1.50 1.25 1.00 1.00 1.00 1.00 1.00 1.00
Euribor 3 months 1.39 1.49 1.54 1.44 1.10 0.81 1.02 0.87 0.69 0.66
Euribor 1 year 2.01 2.05 2.11 2.13 1.74 1.35 1.52 1.40 1.25 1.22
USA Federal rates 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25
TIIE (Mexico) 4.82 4.80 4.81 4.85 4.85 4.91 4.87 4.91 4.94 4.92
Exchange rates

(Expressed in currency/euro)

Year-end exchange rates Average exchange rates

31-12-11 Δ % on
31-12-10 Δ % on
2011 Δ % on
2010 Δ % on
Mexican peso 18.0512 (8.3) 16.5475 4.8 17.2906 (3.2) 16.7372 8.7
U.S. dollar 1.2939 3.3 1.3362 11.3 1.3916 (4.7) 1.3257 0.2
Argentinean peso 5.5679 (1.5) 5.4851 (0.2) 5.7467 (8.3) 5.2686 (8.4)
Chilean peso 674.76 (7.3) 625.39 8.3 672.04 0.5 675.68 15.7
Colombian peso 2,512.56 1.8 2,557.54 17.1 2,570.69 (2.0) 2,518.89 15.8
Peruvian new sol 3.4890 7.6 3.7528 19.3 3.8323 (2.3) 3.7448 9.3
Venezuelan bolivar fuerte 5.5569 3.3 5.7385 (44.3) 5.9765 (5.9) 5.6217 (49.9)
Turkish lira 2.4432 (15.3) 2.0694 (11.8) 2.3383 (14.6) 1.9965 (7.5)
Chinese yuan 8.1588 8.1 8.8220 20.5 8.9932 (0.2) 8.9713 5.9
Global GDP growth

(Percentage real growth)

2011 2012 e
Global 3.9 3.5
Euro Zone 1.5 (0.5)
Spain 0.7 (1.3)
The United States 1.7 2.3
Mexico 3.9 3.3
Latin America 4.4 3.6
China 9.2 8.3
Turkey 8.5 1.9
Source: BBVA Research.