Economic activity in the United States in 2012 has been uneven. The year began with relatively strong activity. Business confidence and industrial output had been gaining momentum since the end of 2011. However, in the second quarter, growth was slowed by weak consumption and high oil prices. The situation was worsened by the heightened sovereign debt crisis in Europe in the first half of the year. In the third quarter, economic conditions improved significantly. However, growing uncertainty surrounding the imminent fiscal reform had an adverse effect on activity toward the end of 2012. The latest data also suggest the negative impact of Hurricane Sandy, which has added further pressure on output and expenditure in the fourth quarter.
The concerns about inflation diminished considerably when oil prices increased in early 2012. With stable inflation expectations in the long run, the Federal Reserve (Fed) has shifted its main focus of attention to boosting employment through additional quantitative easing, anticipating that the exceptionally low federal funds rate will probably be justified until at least mid-2015. Ultimately, the Fed is willing to accept higher inflation in the short term in order to reach a point where the economy is sufficiently strong to generate employment on its own.
The prospects for 2013 are modest, due to possible tax hikes and spending cuts, which will probably have a negative impact on business expansion plans and consumer spending. In general, the risks for 2013 have a negative bias and include, among other factors, the fiscal reforms, the European crisis, ongoing household deleveraging and geopolitical conflicts.
As regards the financial sector, the health of the U.S. banking system has continued to improve in 2012, and there are now fewer institutions facing problems. Most banks are increasing earnings, asset quality, capital and liquidity.
The main reason for better earnings is the improvement in asset quality, which has had a positive impact on loan-loss provisions, as it has freed up loan-loss reserves. However, revenue growth has been limited due to the current environment of low interest rates and a relatively flat curve which increased pressure on net interest income in the sector.
In lending sticks out the corporate and industrial sectors which continued to perform well, despite the uncertainty regarding fiscal policy. This growth is even clearer in the fourth quarter in commercial real-estate (companies with collateral) and in credit card balances (due to the Christmas holiday season). Lending conditions are likely to remain strict in 2013, particularly for residential loans, in light of the high financial burden of households.
The main indicators of asset quality show a positive trend. However, the NPA ratio in the residential portfolio rose slightly in the third quarter of 2012.
Deposits remained robust throughout the year, helped by the lack of high-yielding investment alternatives and the recent uncertainty regarding the fiscal cliff.
The dollar’s final exchange rate against the euro depreciated on a year-on-year basis, but the average rates appreciated year-on-year. Therefore, the impact of the currency on the Group’s balance sheet and business activity is negative, but positive on earnings. To assist in the understanding of the area’s business figures for the year, unless otherwise indicated, the comments below refer to percentage changes at constant exchange rates.