In 2014, global GDP(1) grew by 3.3%, 0.1 points more than in 2013. The pace accelerated over the year, boosted by rising GDP growth in developed economies, particularly in the U.S. In contrast, it slowed in the emerging economies, both in Asia and above all South America, which was affected by the impact of the fall in commodity prices and reduced demand in China. Overall, the global recovery is slow, particularly in the most developed economies, which in some cases have to continue to reduce their levels of debt accumulated in the previous expansive stage. Emerging markets are facing the challenge of lower commodity prices and the structural change resulting from a transformation to the pattern of growth in China from exports to domestic consumption. Another element to consider in the global economic scenario is the role of international trade, which has slowed beyond the level to be expected from the moderation in global economic activity.
Economic activity in the U.S. appears to be growing at a steady pace, with stronger GDP growth than expected, robust growth in employment and private consumption being boosted by the increased purchasing power of consumers. However, there are other details that reflect what still a vulnerable recovery is: downward pressure on long-term Treasury yields due to the current safe-haven strategy; slow global demand and the appreciation of the US dollar, limiting exports; as well as the current uncertainty regarding the adjustment in monetary policy next year.
With respect to the Eurozone, the effect of geopolitical risks and the lack of reforms have left their mark on growth, which has fallen below 1%. The recovery has been delayed, although the fundamentals continue to be positive. The factors lying behind this delay in recovery are the crisis between Ukraine and Russia, which is affecting confidence, investment and expectations, and a lack of strength in domestic demand. The fundamentals for growth are: moderate but positive progress in the global economy; a fiscal policy that is no longer a drain on growth; the abundance of liquidity; depreciation of the exchange rate; and compliance with the steps planned for banking union.
In Spain, the data on economic activity confirm that recovery has continued to move forward. Improved domestic demand (mainly private) has been based on temporary factors (reduction in uncertainty), greater support from fiscal and monetary policies and on structural factors such as the progress made in correcting internal imbalances and some of the reforms carried out over recent years. Over the year Spanish exports have stagnated in a foreign environment conditioned by the lack of strength in the European economy and growth in financial tensions.
Emerging economies maintained positive growth, although more moderate than in previous years.
In Mexico, following the slowdown in the first quarter of the year, the Mexican economy has improved thanks to increased foreign demand to an expected GDP growth of 2.1%. Among the factors explaining the moderate growth is lower oil prices and production, a delay in the execution of major public investment projects and weak internal demand, which crucially depends on the creation of formal jobs.
In Turkey, monetary policy decisions taken at the start of the year managed to stabilize the economy and moderate the current account deficit. Inflation remained high due to the depreciation in the Turkish lira (affected by geopolitical factors), but it began to be corrected toward the end of the year, supported by the major fall in energy prices.
In South America, economic growth slowed substantially in 2014 for a number of reasons: the less favorable international environment; falls in commodity prices; a slowdown in activity in China; and the increased volatility in the financial markets due to the start of interest-rate rises in the United States. However, growth started to rise in the third quarter of 2014 on the back of greater global growth and increased public investment in many countries in the region.
In general terms, financial tensions have remained limited and volatility has remained low, despite some episodes of risk aversion. The behavior of the markets has continued to be impacted by the central banks. Supported by an economy that is more advanced in the cycle, the Fed has maintained its tapering process and ended the asset purchase program in October 2014, as expected. In contrast, the ECB and the Bank of Japan have reacted to deteriorating expectations with respect to growth and above all inflation. Specifically, the ECB cut its official benchmark rate to 0.05% and its deposit rate to a negative -0.20%, and announced a new liquidity program for the banks, associated with new credit (TLTRO) and covered bond and asset-backed securities purchase programs. For 2015 the ECB announced asset purchases for €60 billion per month until at least September 2016, including the programs of acquisition of asset-backed securities and covered bonds currently underway. Overall, these measures represent a liquidity injection of at least €1,100 billion euros over the year and a half, with the aim of restoring the size of its balance sheet to the levels of the start of 2012. The ECB announcement has convincingly exceeded market expectations.
In this environment of abundant liquidity one-year interest rates have fallen moderately in the United States and more aggressively in Europe, in both the core and the peripheral countries.
(1) BBVA Research estimate, with IMF data and weightings and IMF and BBVA Research forecasts2.1.1 Trends in exchange rates
The euro began to fall against the dollar in the third quarter of 2014, following changing expectations of monetary policy in the U.S. (tightened) and the Eurozone (eased). Similarly, the euro began to fall against other currencies in the final part of the year, therefore the currencies with greater relative weight in the Group’s financial statements (mainly Mexican Peso, Dollar and Turkish Lira) are, as of December 31, 2014, more appreciated than as of December 31, 2013, resulting in a positive impact on the balance sheet and the total equity.
This appreciation of the currencies against the euro by the end of the year has not been fully translated to the average exchange rate of 2014. This appreciation and the evolution of the exchange rates during 2013 explains that the average exchange rate decreased with respect to the year ended December 31, 2013 resulting in a negative impact on the results of operations.
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Average Exchange Rates | Year-End Exchange Rates | ||||
|---|---|---|---|---|---|---|
| Currency | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 |
| Mexican peso | 17.66 | 16.96 | 16.90 | 17.87 | 18.07 | 17.18 |
| U.S.dollar | 1.33 | 1.33 | 1.29 | 1.21 | 1.38 | 1.32 |
| Argentine peso | 10.77 | 7.28 | 5.84 | 10.38 | 8.99 | 6.48 |
| Chilean peso | 756.43 | 658.33 | 625.00 | 736.92 | 722.54 | 633.31 |
| Colombian peso | 2,652.52 | 2,481.39 | 2,309.47 | 2,906.98 | 2,659.57 | 2,331.00 |
| Peruvian new sol | 3.77 | 3.59 | 3.39 | 3.61 | 3.85 | 3.37 |
| Venezuelan bolivar (*) | 14.78 | 8.05 | 5.52 | 14.57 | 8.68 | 5.66 |
| Turkish lira | 2.91 | 2.53 | 2.31 | 2.83 | 2.96 | 2.36 |
2.1.2 Relevant events: the banking system
In Europe progress has been made in banking union with the approval of the key European regulations governing financial systems. Following the agreement between the European Commission and Parliament to create the Single Resolution Fund, the intergovernmental agreement on mutualization of contributions was signed in April, complementing the Regulation on the Single Resolution Mechanism (SRM).
In May the European Parliament also approved the Bank Recovery and Resolution Directive (BRRD), which takes effect on January 1, 2015. Among other matters, it covers the circumstances for triggering the resolution of a bank and the scope of the bail-in mechanisms, which will come into force in January 2016. In Spain the Bill transposing the directive was published in November 2014.
One of the most important events in the year was the comprehensive assessment of European banks by the European Central Bank (ECB) before it took up its role as sole bank supervisor in November 2014. The exercise rested on two fundamental pillars: (i) an asset quality review (AQR), which aimed to evaluate the correct accounting classification and valuation of assets under comparable criteria; and (ii) the stress tests. For these the ECB, together with the European Banking Authority (EBA), analyzed the capacity of each bank to maintain adequate levels of solvency under two stress scenarios: baseline and adverse. In October the ECB published the results of this exercise. The AQR, which required banks to have a minimum Common Equity Tier 1 (CET1) ratio of 8%, revealed a capital shortage of €5 billion, distributed among 16 banks. In the stress tests the banks were required to maintain a minimum CET1 ratio of 8% in the baseline scenario and 5.5% in the adverse scenario. The overall capital shortfall in the comprehensive assessment stood at €24.6 billion, focused on Italy (€9.7 billion) and Greece (€8.7 billion). Of the 25 banks that failed the test, 12 were technical failures, since in 2014 they have already raised sufficient capital to cover the shortage, so the final shortfall was only €9.5 billion. The publication of the results marks the completion of one of the major steps toward creating a fully-functioning Banking Union. The transparency of the banks has been increased significantly, and the test has confirmed that the European banking system is resilient to an adverse economic scenario, with very acceptable capital shortfall of around €9.5 billion. Starting on November 4, the ECB became the sole supervisor of the banks subject to comprehensive assessment.
Finally, in June the ECB approved a broad package of measures:
- A cut on interest rates that left the basic open market transaction rate at 0.15% and the deposit window rate in negative territory for the first time ever.
- The announcement of various targeted long-term refinancing operations (TLTROs) for banks, conditioned on the provision of credit to the real economy, excluding the public sector and residential mortgages. In an initial phase, the European banks could apply for up to €400 billion of ECB finance at a very limited cost (0.25%) and with a maximum maturity of four years. However, the final demand was around €213 billion.
- Starting in October, the launch of a program of covered bond purchases amounting to €37.2 billion, and of asset-backed securities, amounting to €2.3 billion.
In Spain, the financial assistance program was concluded, officially expiring on January 22. In line with the planned schedule, Spain implemented all the restructuring measures agreed with the Troika (the European Commission, European Central Bank and International Monetary Fund). Since then, progress has been made in restructuring the system, with the disposal of state investment in entities that required public money and the privatization of Catalunya Banc.
In the area of structural reforms, Royal Decree-Law 4/2014 reforming the insolvency law has streamlined and made more flexible the processes for concluding refinancing agreements and eliminates rigidities in the insolvency and pre-insolvency regulations. This law will help companies that remain operationally viable to restructure their debt.
The liquidity situation in the banking system and its funding structure have improved since the start of the year, and net funding obtained from the ECB has fallen. The 2014 results showed a recovery in profitability. Solvency ratios have also improved as a result of the internal generation of earnings, the deleveraging process and capital increases.
The publication of the results of the comprehensive assessment exercise on European banks has demonstrated the robustness of the Spanish banking system. The asset quality review (AQR) identified a low volume of adjustments required (€2.2 billion, i.e. 14 basis points of CET1 capital, the lowest in Europe) and the resilience of the banks' capital to the stress tests was very high. In the adverse scenario the Spanish banks had the second smallest reduction in the capital ratio after Estonia. Only one Spanish bank, Liberbank, showed a capital shortfall (€32 million in the AQR), which was already addressed in 2014 with a capital increase of €575million.