The slowdown has intensified in 2012
In 2012, the global economy has grown just over 3%, a year-on-year rate which is slightly lower than the average for the last three decades (3.5%). This slowdown in world growth is largely due to further flaring up of financial tensions in Europe. The rest of the slowdown has been caused by the contagion from Europe to other geographical areas, limited support from demand policies in emerging economies and uncertainties about how to define such policies in the United States.
Download Excel
| GDP Increase | 2012 | 2011 |
|---|---|---|
| Global | 3.2% | 3.9% |
| Europe | -0.5% | 1.5% |
| Spain | -1.4% | 0.4% |
| United States | 2.1% | 1.8% |
| México | 3.7% | 3.9% |
| South America | 2.7% | 4.5% |
| China | 7.6% | 9.2% |
| Turkey | 3.0% | 8.5% |
Europe is on the road toward more solid -but not as quick- economic and monetary union. Many events have occurred in 2012 which have triggered unease in the markets. First, uncertainties about how to reach fiscal austerity targets without hampering growth. Second, uncertainties arising from the state of the financial system in certain countries, where it is subject to pressure due to lack of growth and suspicion spreading about the solvency of government and government agencies. Lastly, the degree of commitment of certain countries toward the common European project, which at some points during 2012 prompted fears of a break-up of the euro (fears which were later dispelled).
However, 2012 has also been a year marked by essential steps taken to resolve the financial crisis in Europe. First, the commitment toward the euro has been reinforced, once the Greek elections led to the formation of a government which took a responsible view of the adjustments needed for it to remain in the common monetary area. Second, peripheral countries have carried out major structural reforms. Third, significant progress has been made in restructuring the financial systems which were hardest hit by the crisis that began in late 2008 -such as Spain’s- with the approval of a credit facility for the recapitalization of the most vulnerable institutions. Finally, the euro zone has also worked on its governance, with the establishment of a fiscal agreement, the setting-up of the European Stability Mechanism (ESM), the first steps taken toward banking union, and, decisively, the commitment of the European Central Bank (ECB) to do whatever is necessary to eliminate the risk of euro convertibility by announcing the launch of a bond repurchase program on the secondary market for those countries which request assistance from the ESM. Financial tensions in Europe have eased considerably in the latter part of 2012 thanks to the adoption of these measures. Nonetheless, these measures have not been enough to prevent the European economy from gradually slowing over the course of the year to the point of stagnation. Overall, GDP growth in the euro zone declined by 0.5%, from the growth of 1.5% it posted in 2011.
Meanwhile, the Spanish economy has been the focus of financial tensions, at their highest in spring 2012, when spreads were at their widest, while access to finance from the different sectors of the wholesale markets was severely restricted. However, important steps forward have also been taken. On the one hand, measures have been taken to meet fiscal targets through a combination of tax hikes and reduced public spending. There was some progress made in this respect in the latter part of 2012, though probably not sufficient to offset the accumulated deviations. Second, the Spanish financial restructuring map is almost complete. For that purpose, the Spanish economy has obtained an advantageous credit facility from the ESM, enabling it to recapitalize institutions with solvency problems in stress scenarios. Critical structural reforms have also been implemented, such as in the labor market, thereby increasing the growth capacity of the Spanish economy. Spain has also benefited from decisions taken within the European framework, particularly in terms of the start-up of the ESM and the ECB’s commitment toward supporting the financing of Spanish sovereign debt through the purchase of Spanish government debt once the authorities agree to request funds from the ESM. Overall, with the measures taken by the Spanish authorities and the support from euro zone measures, there has been a partial easing of financial tensions, despite the economic contraction (-1.4%) in 2012, following on growth of a mere 0.4% the previous year.
Economic recovery has continued in the United States throughout 2012, albeit at a slower pace than that reported in similar cyclical stages in the past. In fact, although GDP has grown in the region by around 2%, there has been a marked slowdown in the latter part of the year. Private demand has remained feeble throughout the period, due to the high levels of uncertainty abroad and also doubt about the resolution of the fiscal cliff, meaning the automatic activation of program of tax hikes and spending cuts that might be on a sufficient scale to push the US economy into recession. However, there has been a certain degree of recovery in some sections of economic activity, such as the housing market. At the same time, monetary policy has helped to keep expectations positive through a new quantitative easing program and the commitment toward continuing with a low interest rate scenario for the time it takes to reduce the unemployment rate.
Emerging economies are not immune to the global deterioration, but they continue to report significant growth rates. Emerging markets in both Latin America and Asia have also felt the effects of the global financial tensions and the stagnation in the European economy, even though domestic demand in these countries has remained sound. Exports, however, have been adversely affected. As a result, growth in Latin America has slowed to around 3% in 2012 (due particularly to the poor performance in Brazil), while Asia (not including China) has grown a few tenths of a point below 4%.
Despite the weakness shown by its main foreign market (United States), the Mexican economy has reported above-average growth rates in the region and has also outstripped its own average for the last decade. In fact, growth has continued close to 2011 levels, at around 4%. This is largely due to sound domestic demand, underpinned by the rise in employment and the availability of credit, but also to the greater foreign competitiveness of the Mexican economy. Although Mexican inflation stands above the target set by the Central Bank, this is due to temporary factors affecting the prices of certain products. The outlook is thus for monetary policy to be maintained.
In South America, growth has been hampered by Brazil, which has hovered around stagnation during most of 2012. In most South American countries, however, growth has been even higher than expected, despite the deterioration abroad, given that commodity prices have remained high and financial tensions have eased. In this context, both consumption and investment have continued to be shored up by the strength of the labor and credit markets and by still expansive monetary policies.
The gentle slowdown which China has been experiencing for some time, largely due to the economic policy measures taken to minimize the risks of overheating, has been heightened as the environment abroad has weakened. This has sparked fears of a hard landing for the Chinese economy. Nevertheless, the economy has stabilized in the latter part of 2012 and the authorities have stated that they will continue to use both monetary policy and fiscal stimulus measures to keep China’s growth at acceptable levels. Even though GDP has slowed to 7.6% in 2012 (from rates of between 9% and 10% in the three preceding years), there have been signs of an upturn in activity at the tail end of 2012.
Lastly, Turkey has been affected by European tensions, not only in its financial markets, but also from the knock-on effect of lack of external demand. Activity has also slowed down due to the measures taken to correct the imbalances accumulated on Turkey’s current account and in inflation. Even so, Turkey grew by 3% in 2012. The authorities are continuing to push through measures designed to reduce the economy’s traditional imbalances (such as energy dependence). In fact, there are clear signs of improvement in the external deficit.
Trends in exchange rates
In the currency markets, the euro depreciated significantly against the dollar in the first half of the year due to the heightened perception of risk with respect to the European debt crisis. Nonetheless, the steps taken by the ECB during the summer to reduce fragmentation in the euro zone’s financial markets helped strengthen the euro in the second half of the year. Nevertheless, the euro suffered a 7.7% annual average depreciation against the dollar. Currency movements against the dollar in the emerging countries have also been determined by the increase or decrease in perceived risk. Given that the problems were focused on the euro zone, however, global liquidity has continued to rise and, as a result, the perception in these economies is of a sounder macroeconomic environment. Thus, in relative terms, their currencies have been less affected by episodes of risk, resulting in favorable overall performance of the currencies with the greatest weight in BBVA’s financial statements. As a result, exchange rates had a positive impact on the year-on-year comparison of the Group’s financial results.
In year-end exchange rates, the dollar has lost 1.9% against the euro over the last twelve months, as have the Argentinean peso (14%) and the Venezuelan bolivar fuerte (1.8%); while the following currencies have gained against the euro: the Colombian peso (7.8%), Mexican peso (7.6%), Chilean peso (6.5%), Peruvian new sol (5%), and the Turkish lira (3.7%). To sum up, the exchange-rate effect is also positive on the balance sheet and activity.
In 2013, the dollar is expected to continue appreciating slightly against the euro, while the currencies of emerging economies will have some room for appreciation against the dollar.
Download Excel
| Currency | Average Exchange Rates | Year-End Exchange Rates | ||||
|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | |
| Mexican peso | 16.90 | 17.29 | 16.74 | 17.18 | 18.05 | 16.55 |
| U.S.dollar | 1.29 | 1.39 | 1.33 | 1.32 | 1.29 | 1.34 |
| Argentine peso | 5.84 | 5.75 | 5.27 | 6.48 | 5.57 | 5.49 |
| Chilean peso | 625.00 | 672.04 | 675.68 | 633.31 | 674.76 | 625.39 |
| Colombian peso | 2,309.47 | 2,570.69 | 2,518.89 | 2,331.00 | 2,512.56 | 2,557.54 |
| Peruvian new sol | 3.39 | 3.83 | 3.74 | 3.37 | 3.49 | 3.75 |
| Venezuelan bolivar | 5.52 | 5.98 | 5.62 | 5.66 | 5.56 | 5.74 |
| Turkish lira | 2.31 | 2.34 | 2.00 | 2.36 | 2.44 | 2.07 |
| Chinese Yuan | 8.11 | 8.99 | 8.97 | 8.22 | 8.16 | 8.82 |
Relevant events: the banking system
The achievement of banking and fiscal union in Europe will be crucial for giving greater credibility to the European project. For the banking sector in Europe, 2012 has been a year of great financial tensions, as mentioned before. These tensions mean that the positive effect of the ECB’s liquidity injection on risk premiums has virtually dissipated.
In the second half of the year, it was again the ECB which took a decisive step to bring the debt crisis in Europe to an end by embarking on a new program to buy public debt. Following the Eurogroup summit in late June, Europe has been working on the design of a roadmap for banking and fiscal union, conditions which are considered to be necessary to make the European project credible.
In Spain, significant progress has been made in restructuring the financial system, with the implementation of major reforms, while evidencing the diverse nature of the Spanish banking sector. The following are some of the highlights:
- Enactment of the two Royal Decrees in February and May designed to ensure sufficient provisions for real-estate asset risk (problematic and non-problematic).
- Approval by the Eurogroup for a loan of up to €100,000 million to bolster the solvency of the Spanish financial system.
- Approval of Royal Decree-Law (and subsequent Act) for the Restructuring and Resolution of Credit Institutions, which is an essential tool for managing crisis in financial institutions. This is a major step forward in reforming the system, as it reinforces the instruments available, the role of public institutions and the procedures for the restructuring and resolution of financial institutions.
- Publication of the results of the stress tests carried out on Spanish banks by two independent international consultants (top-down tests). The stress tests identified capital requirements of between €51,000 million and €62,000 million. Following this, the results of the stress tests on the same 14 Spanish banking groups carried out using individual analysis of each institution were published (bottom-up tests). The results revealed capital requirements of €54,000 million limited to institutions which account for around 30% of the system’s assets, and concentrated in those controlled by the Orderly Bank Restructuring Fund (FROB).
- Creation of the Asset Management Company for Assets Arising from Bank Restructuring (SAREB), controlled by the FROB with a minority stake. The SAREB will be responsible for managing assets linked to the real-estate sector transferred to it by nationalized banks and those requiring an injection of public funds. It will manage assets of around €51,000 million, of which €36,000 million have already been transferred to the four institutions controlled so far by the FROB.
In the midst of all these events, the financial industry has continued with its deleveraging process, which has involved a reduction in business volume and a negative impact on the NPA ratio of the sector, which at the end of October amounted to 11.23% for the system as a whole.
The easing of financial tensions in the closing months of 2012 has prompted a reduction of the net funds requested from the ECB, funds which amounted to €313,000 million in December, after a high of €389,000 million in August.