The economic background
2009, a highly complex environment…
In 2009 there was a strong contraction of economic activity in the initial months of the year. A broad range of countries introduced exceptional public stimulus measures, both monetary and fiscal. As a result, a large number of economies managed to close the year with positive quarterly growth rates. This has come as a breath of fresh air for the expectations of economic agents; it has also meant that 2010 has started with better perspectives, despite the major economic slump in 2009.
A significant feature of this incipient recovery is the variety among both countries and regions. Emerging economies, particularly Asia and Latin America, are proving the main motor for growth in the global economy. In many cases, this has enabled them to recover to pre-crisis output levels. However, the developed economies are at a phase of more incipient recovery. Their main problems are the upturn in unemployment and the need to carry out a tough and difficult deleveraging process, which in the final analysis will weaken the rate of growth in their domestic demand. Among these countries, the United States has a sounder base than Europe, although the level of recovery is still at a very incipient stage in both.
From now on, therefore, the uncertainty is focused on the sustainability of this recovery. The main risk that has to be faced will be the premature withdrawal of the stimulus plans, mainly in the most advanced economies, where the fragility of private consumption is obvious, and where the risk of new financial shocks continues. In addition, the challenge of correcting global imbalances still has to be met. The maintenance of a path of long-term sustainable growth will largely depend on a return to a global balance that modifies the patterns of saving and consumption in the developed and developing economies: in other words, the first ones should increase their savings and the second ones, their consumption. At the moment, households in developed countries are immersed in a process of deleveraging which is moving in the right direction. The process has largely been imposed by the high rate of indebtedness incurred over the years before the crisis.
In general, 2009 can be divided into three separate periods. The first corresponds to the economic slump and the extraordinary measures of government support; the second features stabilization and the first signs of recovery; in the last, the markets focused on finding exit strategies from the expansive policies that had been in force.
Thus the first period corresponds to the start of 2009. To a large extent, it features a high level of negative inertia carrying on from the end of 2008, in which the financial crisis, loss of confidence and slump in trade intensified the recession. Thus the number of economies in recession at the same time reached the heights of the Great Depression. This supported the idea that if growth was to return, exceptional measures would inevitably have to be implemented in a context in which the losses of financial institutions and their capital requirements continued to focus most of the uncertainty. These concerns were reflected in the markets via the search for safe-haven assets and a renewed preference for domestic assets. As a result, stock markets reached their minimum levels in March, the yield on Treasury bonds remained at very low levels and the dollar appreciated to close to 1.25 against the euro. Monetary policy offered new alternatives through extremely expansive fiscal measures, more so in the United States than in Europe. The fall in the levels of economic activity and the sudden collapse of commodity prices led to a quick drop in inflation rates, which gave central banks room to apply unconventional measures or expand traditional measures as far as possible. The European Central Bank (ECB) continued to cut interest rates back to 1.0% and increased the maturity of full-allotment auctions to 12 months. The Federal Reserve, whose official rate had already hit the 0% threshold, started a number of programs to purchase assets with the aim of reducing the cost of financing American mortgages.
This was the start of the second period, in which the package of measures adopted, along with the attitude of the U.S. towards tackling the financial problem, proved a boost for international financial markets. The performance of stress tests on the balance sheets of the biggest financial institutions revealed the system’s specific capital requirements and thus reduced uncertainty. Some financial institutions began to issue unsecured debt and to repay the capital injections received from the Treasury at the time of greatest vulnerability, thus easing financial tension. The improvement in some economic indicators consolidated the first signs of “green shoots”, which were confirmed with the third quarter results. This growth was supported by the strength of the Asian region, the restructuring of inventories and improved confidence levels.
… with a turning point in the last part of the year
Towards the end of the year, in other words in the third period, it became clear that global growth was being led by the emerging economies in Asia and Latin America, and that growth in developed countries still depended heavily on stimulus packages. The debate at the time was about the biggest challenge faced by economic policy: the need to calculate the right time to withdraw the government support programs, given that a premature withdrawal could check the improved trend, while if it was late it could generate risks in the medium term.
In spite of the recovery witnessed in the second half of the year, 2009 could end with a contraction of 2.5% in the United States and 3.9% in the Euro zone, with a inflation rate of –0.3% as an annual average in the U.S. and around 0.3% in Europe. The wider scope of the U.S. fiscal program and increased determination to tackle the financial problem will lead to higher growth rates than in the euro zone in 2010. In addition, in Europe the fiscal problems that some economies such as Greece are facing will have a negative effect by significantly increasing the sovereign risk.
As regards the Spanish economy, the fall in the GDP would be similar to that in the euro zone (–3.6%), due to the positive countercyclical contribution from the foreign sector, and the greater size of its fiscal stimulus package compared with Europe. These factors have counteracted some others which have the opposite effect, such as job losses, the resizing of the real estate sector and the deleveraging process in the private sector. Year-end average inflation for the year was negative (–0.3%).
In Mexico, after facing the collapse of international trade and the H1N1 flu outbreak, the results for the end of the year confirm the path towards recovery. In addition, the relative strength of employment compared with other crises, the increase in competitiveness and the better performance of the United States, all encourage growth expectations close to 3% for 2010. Other countries in the region, such as Colombia and Peru will also experience strong growth in 2010.
In general, the emerging economies, except those of Europe, are on the way towards sound recovery, supported by factors such as their earlier policies of macroeconomic stability (current account and fiscal surplus and inflation under control), which have allowed the implementation of fiscal and monetary measures. Some of these economies have also had a significantly lower exposure to the financial crisis than developed countries, and in the final part of the year they have also been helped by the recovery in commodity prices.
The performance of the financial markets largely anticipated the economic improvement throughout 2009. Financial tension has continued to ease, although it should be remembered that this situation was largely the result of public aid. As a result, the stock markets have recovered from their lows in March, led by the emerging economies in both Asia and Latin America.
The trend in long-term interest rates, both in the United States and Europe, has been slightly upward over the year, as the exit from recession began to be appreciated, particularly in the United States.
On the foreign exchange markets, after being favored by the safe-haven effect during the first quarter of the year, the dollar weakened significantly following the Federal Reserve announcement of its substantial asset purchase program. Other short-term factors linked to the interest rate spread, along with the diversification of reserves prompted by the debate on the reserve currency status of the U.S. dollar, encouraged this trend. Thus, as an average for the year the dollar appreciated by 5.4% against the euro, while the performance of the European currency against those with the biggest weight on the BBVA balance sheet was mixed, with some that appreciated on average against the euro (Peru and Venezuela) and others that depreciated (Mexico, Colombia, Argentina and Chile). As a result, the effect of the foreign exchange rate on the year-on-year comparison of the income statements is negative by about five percentage points.
With regard to year-end foreign exchange rates the U.S. dollar has depreciated in year-on-year terms, as have the Argentinean peso and the Venezuelan bolivar. The rest of the currencies with an impact on the Group’s financial statements (Mexican, Chilean, Colombian pesos and the Peruvian sol) have appreciated. The final impact of this is slightly positive on the sums on the balance sheet and in terms of activity.
2010: the year of recovery which will nonetheless be slow, non-homogeneus and subject to risks and uncertainty ...
In terms of the outlook for 2010, we can expect a recovery that will, however, be slow, varied and, in most of the advanced economies, subject to risks and uncertainties. In the United States, preliminary data for growth in the fourth quarter of 2009 (+1.4% quarterly) anticipates a swifter recovery than in Europe. However, the country will have to face significant challenges to mitigate certain uncertainties, such as the intensity and duration of the deleveraging process and the change in the trend of the labor market. To sum up, United States economic GDP growth will probably continue historically weak, at a rate of 1.9% for 2010.
... and with more moderate growth in Europe than the United States
In Europe the rate of recovery is expected to be even slower. Although the data on confidence and economic activity in recent months reflect some improvement, the adjustments pending are similar to those in the United States, but the economy has less flexibility to tackle them. In addition, the high deficit and debt levels in many European countries limit the room for maneuvering of economic policies. For these reasons, we expect a growth rate in Europe in 2010 of 0.6%. In the case of Spain it will still be negative, at –0.8%,
Emerging economies will continue to show vigorous growth. Led by China, this will be the region which will make the biggest progress thanks to expansive policies adopted in 2009 and the start of recovery in world trade. In this context, private consumption in China is expected to gradually gain more weight. Meanwhile, Latin America will maintain an equally sound recovery, backed by the macroeconomic stability constructed in the years before the crisis, the financial strength derived from orthodox policies, the favorable commodity-price environment and the strength of domestic demand. Mexico will have one of the soundest increases in the region in 2010, in part due to the United States recovery.
On the financial markets, the continued policies of low official interest rates in developed countries will serve to anchor the public debt yield curves. Foreign exchange rates will remain relatively stable in all regions, with dollar continuing to appreciate against the euro. Emerging currencies will also appreciate against the dollar.
