The global economy closed 2013 with growth of 3%, a few tenths of a percentage point below the figure for 2012. The slowdown has been caused by the weakness of developed economies for most of the year, particularly in Europe, as emerging markets continued to grow at a relatively strong pace. However, this trend began to change halfway through the year, when there has been a significant improvement in the global mood, above all after Europe began to show some signs of recovery and of emerging from the recession.
The financial markets also performed better in 2013 than the previous year. Europe has not been a source of systemic financial tension, and confidence in the currency has been restored. The euro has emerged strengthened after the reforms adopted and the commitment to move toward banking union in the zone. In contrast, there have been some difficulties in the United States in reaching long-term agreements to resolve the fiscal deficit crisis, leading to the "fiscal cliff" at the start of the year (with the resulting rise in taxation and general reduction in public spending) and the temporary shutdown of the federal government in the fall. Globally, markets (particularly assets in emerging markets) have been affected by the announcement by the Federal Reserve that it was considering easing off its monetary expansion policy in a process known as "tapering". As a result, global financial conditions are now tighter, and emerging countries have been affected by reductions in asset prices, capital outflows and currency depreciation.
The recession that hit Europe in 2012 (a GDP fall of 0.6% year-on-year) extended through much of 2013, so this year as a whole the European economy has declined by around 0.5%. However, its tone has improved steadily over the year. A positive feature of the process of European recovery is that it has taken place across the board, i.e. not only limited to core countries. In fact, the peripherals have also improved their economic activity and some have even emerged from the recession and posted positive growth rates. Two factors lie behind this improvement. One is that the process of fiscal consolidation has been less of a drain on the economy following the relaxation of the fiscal targets. The second reason is that financial tensions have been kept tightly in check, despite the existence of various factors that could have generated a widening of spreads. It is also worth noting that part of the improvement in confidence with respect to the euro has come from the efforts to improve governance in Europe; in particular, the attempts to create a real banking union on which the European authorities have been working throughout 2013 and which will be established over various stages over the next few years. In any event, the situation remains fragile, and that is why the European Central Bank (ECB), which has also taken into account the very low rate of inflation and a high level of financial fragmentation, has decided to lower interest rates to record lows. It has also stated that it is ready to consider further measures to provide liquidity to the financial system in the long term, were it to prove necessary. This latter point will hinge greatly upon a test of the soundness of the European banking system in 2014, both in terms of the quality of its capital and resilience to stress scenarios.
In the latter part of 2013 the Spanish economy put an end to the long period of recession that has led it to accumulate a further year-on-year fall of 1.3%. The incipient recovery is based on sustained growth in exports and on a less contractionary domestic demand. The fiscal consolidation targets have been relaxed, while market confidence has improved. As a result, there has been no major financial tension, spreads have narrowed significantly and the economy has opened up to international financial flows. Even so, the recovery has started from a low point, particularly in terms of unemployment, which is still over 25% of the active population.
Economic activity in the United States has also gained strength during 2013, although the less positive figures at the start of the year have led to a slowdown in GDP in year-on-year terms from 2.8% in 2012 to slightly below 2%. Nonetheless, the trend is positive. Consumption and residential mortgage lending remain solid, while in the labor market employment continues its moderate growth, and thus unemployment is falling. However, uncertainty has continued to affect the economy, in particular due to doubts about how soon the authorities were going to limit the expansive tone of fiscal and monetary policies.
In fiscal policy, negotiations have continued throughout the year to achieve a comprehensive plan that can address fiscal consolidation with a long-term perspective. This has increased uncertainty and led to a partial shutdown of the federal government in the fall, although in the end the impact on the economy has been limited.
In monetary policy, tapering has been accompanied by an upturn in market interest rates in the United States, which limited the strength of investment in housing. This is despite the fact that the Fed has been very clear that this process would only be introduced if the economy continued on a path of sustained growth. In the end, the start of tapering has been postponed until January 2014, and the Fed has been particularly careful to emphasize its intention of keeping interest rates firmly anchored at low levels until it is sure that the improvement underway is sustainable and strong.
For emerging economies, 2013 has been similar to 2012, with some occasional exceptions. Overall, growth in Latin America has remained at around 2.5%, with the slowdown of the Mexican economy being offset by the partial recovery of Brazil. At the same time, the Asia/Pacific region has once more registered growth at a few tenths of a percentage point above 5% (or around 3.5% excluding China).
However, the positive growth data cannot conceal the fact that the region has been affected by the volatility derived from the announcement of a possibly lower pace of monetary expansion of the United States. The result has been reductions in its asset prices, currency depreciations and capital outflows, hitting countries particularly hard according to the structural weaknesses of their economies and their short-term foreign-currency financing needs. Part of these capital outflows were reversed once the Fed conveyed more information on its plans.
Trends in exchange rates
Throughout this year, currency movements have been determined by expectations of the withdrawal of monetary stimuli by the main central banks and its impact on global liquidity. Thus, the liquidity injections by the Fed and the Bank of Japan maintained the trend for appreciation of most currencies, with a significant impact on the Group's financial statements in the initial months of the year. The only exceptions are the Argentinean peso, the Venezuelan bolivar fuerte (which suffered a devaluation in February) and, to a lesser extent, the U.S. dollar.
However, starting in May 2013 the Fed raised the prospect of a reduction of monetary stimuli. This factor led to a reversal of part of the capital flows that had been entering emerging markets over recent years, with the resulting depreciation of their currencies. In contrast, the reduction in financial tensions in the Eurozone meant that the area became one of the major recipients of flows, leading to a further appreciation of the euro in the second half of 2013.
In all, in terms of final exchange rates the euro has appreciated against the main currencies in both developed and emerging countries. In terms of average exchange rates, there has also been a general appreciation of the euro against nearly all of the currencies that affect the Group's financial statements, except for the Mexican peso (whose rate remained practically stable, as can be seen in the accompanying table). In short, the impact of currencies is negative on both the income statement and the BBVA Group's balance sheet and activity.
In 2014 the dollar is expected to appreciate slightly against the euro, and in general, against the currencies of emerging regions. This appreciation could be more pronounced against the currencies of countries with less solid fundamentals. Moreover, a devaluation of the Venezuelan bolivar is expected in the first quarter of 2014, similar to that in February 2013.
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| Currency | Average Exchange Rates | Year-End Exchange Rates | ||||
|---|---|---|---|---|---|---|
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2013 | 2012 | 2011 | 2013 | 2012 | 2011 |
| Mexican peso | 16.96 | 16.90 | 17.29 | 18.07 | 17.18 | 18.05 |
| U.S.dollar | 1.33 | 1.29 | 1.39 | 1.38 | 1.32 | 1.29 |
| Argentine peso | 7.28 | 5.84 | 5.75 | 8.99 | 6.48 | 5.57 |
| Chilean peso | 658.33 | 625.00 | 672.04 | 722.54 | 633.31 | 674.76 |
| Colombian peso | 2,481.39 | 2,309.47 | 2,570.69 | 2,659.57 | 2,331.00 | 2,512.56 |
| Peruvian new sol | 3.59 | 3.39 | 3.83 | 3.85 | 3.37 | 3.49 |
| Venezuelan bolivar | 8.05 | 5.52 | 5.98 | 8.68 | 5.66 | 5.56 |
| Turkish lira | 2.53 | 2.31 | 2.34 | 2.96 | 2.36 | 2.44 |
| Chinese Yuan | 8.16 | 8.11 | 8.99 | 8.35 | 8.22 | 8.16 |
Relevant events: the banking system
In Europe the financial systems have strengthened their capital and liquidity positions overall. The progress made in the Single Supervisory Mechanism and, in general, in the consensus on banking union has reduced tension and also market fragmentation to some extent. On October 23, the ECB started the process of a comprehensive assessment of the balance sheets of the nearly 130 banks it will supervise in the second half of 2014. The results of this process will be of great importance in allaying doubts about the solvency of the European banking system, recovering investor confidence and quantifying the problems inherited from the crisis, which will have to be resolved at national level.
The latest European agreements, concluded at the December ECOFIN, have meant significant progress has been made in areas such as a single resolution authority, the single resolution fund, and bringing forward the implementation date of the bail-in agreements to 2016. However, it is a process which has its risks, particularly in terms of its implementation.
In Spain, the process of restructuring the financial system has been practically completed. Moreover, at the start of January 2014, the program of European financial assistance to the Spanish banks came to a close. All the banks that needed capital have been recapitalized, the assets linked to the real-estate sector have been transferred to the asset management company SAREB, a process for managing hybrid instruments has been implemented and the framework of governance, regulation and supervision in the sector has been reinforced. In addition, the aforementioned improvement in the financial markets has made it possible for Spanish banks to raise money on the wholesale markets. Lastly, there has been a reduction in net use of ECB liquidity. At the close of November 2013 the amount borrowed amounted to €220,000 million, down from a high of around €400,000 million in the summer of 2012.