2. Economic environment in 2011

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  • Slowdown in the global economy in 2011 against a background of great uncertainty

In 2011 the global economy suffered a moderate slowdown in a year featuring uncertainty generated by the financial markets, in particular the European sovereign debt markets. In 2011 global GDP growth is slightly under 4%, one percentage point below the figure for 2010. Although this figure can still be called solid, the slowdown has begun to be noted with varying intensity in different regions. The greatest contribution has continued to come from emerging countries.

GDP Increase 2011 2010
Global 3.9% 5.0%
Europe 1.6% 1.7%
Spain 0.7% -0.1%
United States 1.8% 3.0%
México 3.8% 5.4%
South America 4.5% 6.6%
China 9.1% 10.3%
Turkey 8.5% 8.2%
Source: BBVA Research

Attention has focused on the progress and setbacks in the resolution of the debt crisis in Europe. In 2011 the global economy has followed events in Europe closely, both in terms of progress towards fiscal consolidation and in relation to changes in the structure of governance in the euro zone. The difficulties in generating adequate progress in both areas lie behind the increased contagion of financial turmoil throughout the year. The initial impact has been on the European periphery that had been unaffected by bailout programs, such as Italy and Spain, and which required occasional market intervention by the European Central Bank (ECB). Next, financial tension also extended to some segments of the financial system that have been affected by recapitalization plans implemented by the European authorities. Finally, doubts about the capacity of governments in the zone to resolve the crisis meant that even core European countries with sound finances have been affected by the tension. Successive European summits over 2011 have not been able to clear up the uncertainty, although there has been progress towards both fiscal harmonization and governance in the euro zone. Against this background, growth in the European economy as a whole has been weak, a fraction under 2% (in line with the growth posted in 2010), although there has been a major slowdown towards the end of the year, and great variation between countries. After an early upward movement, the ECB began to lower rates in response to the increase of risks in the euro zone.

The Spanish economy continues to be immersed in its own adjustments, and growth in 2011 has barely been below 1%. The trend is for a gradual slowdown over the year. However, some of these adjustments are progressing at a good rate. Fiscal consolidation continues, although with some deviation from the 2011 target, and competitiveness is increasing significantly. This has been reflected in a considerable increase in exports.

As for the sovereign risk of European countries, despite the agreements reached at the European summit held at the end of July, sovereign debt markets, including those in Spain, and especially Italy, continue to be subject to intense pressure since mid-August. Sovereign debt spreads in Europe have continued to rise: in Italy from 50 basis points (bp) against 10-year German bonds in April to more than 400 bp at the end of the year. The increase has been more moderate in Spain, from 200 bp to 400 bp over the same period; in the case of Portugal, from more than 500 bp to around 1,000 bp. The fact that sovereign tensions hit Italy directly (the risk premium exceeded Spain’s for the first time since the start of the crisis) revealed that the European Financial Stability Facility (EFSF) alone would not be sufficient to build a firewall against possible contagion from Greece. These pressures have been reflected in a sudden rise in bank CDS spreads (for example Intesa, from 150 to 400 bp and BBVA or Santander from 150 to 300 bp) to levels higher than those recorded after the fall of Lehman Brothers.

The solutions to the crisis, proposed in October 2011 by the European authorities, are going in the right direction. This is the case of the measures that attempt to solve Greece’s insolvency and considerably increase the power of the EFSF. The recapitalization program reinforces the resilience of the banking system, although it does not measure the quality of portfolios and fails to counteract the market’s mistrust on the debt of countries which are solvent. Moreover, because the agreements fail to specify many details that will need to be negotiated in the coming months, the risk of implementation is high and its effectiveness remains to be seen. The new Italian government has approved austerity measures to the value of €30 billion, which should suffice to eliminate the public deficit in 2013. However, the structural reforms needed by the Italian economy have not yet been carried out. In the case of Portugal, the first inspection by the troika expressed its satisfaction with the economy, but also doubts about the country’s ability to achieve the targets set for 2011. This led to a number of measures aimed at covering Madeira’s deficit and the poorer cyclical performance of its economy, including rises in income tax and VAT and the sale of concessions. As a result, GDP is expected to continue to shrink for at least one year, due particularly to the bad situation of the countries that import Portuguese products. Although the deficit targets for 2011 will predictably be met, the need for additional measures for reaching 2012 targets cannot be ruled out. In Spain, the 2011 deviation in relation to the commitments undertaken in terms of deficit, along with the downward revisions of economic activity for next year will require a more intense fiscal consolidation than estimated previously for 2012.

The United States shows greater than expected cyclical weakness, with significant challenges in fiscal policy. The United States surprised with data that suggested a recovery that quickly ran out of steam, although towards the end of 2011 this trend has been partially reversed. Growth slowed in 2011 to around 1.8% (the figure for 2010 is 3%). Fiscal policy has also been key over the year, given the difficulties experienced by the authorities to prepare a plan that balanced the need to support economic activity in the short term with a credible process of long-term consolidation.

Emerging economies are moving towards a soft landing, despite the global uncertainty. Despite the slowdown in advanced economies, emerging economies continue to grow solidly, but towards more sustainable levels, in particular supported by the strength of domestic demand. However, the increase of global risk aversion has also been transferred to the emerging markets. This has been reflected in lower capital inflows, falls in equity markets and foreign-exchange tension.

Economic activity in Mexico is showing some positive signs, but with a trend towards moderation. In 2011 growth is estimated to be a fraction under 4%. At the same time, inflation has remained at around 3.5% and allowed the Bank of Mexico to send more dovish monetary policy messages. The high degree of economic openness of the Mexican economy means that global slowdown has had a local effect, but this has been mainly offset by improved competitiveness in some manufacturing sectors and positive credit conditions.

In South America the global slowdown is resulting in a moderation of the rate of growth towards the end of 2011, with an increase in risk premiums, falls in commodity prices, falling equity markets and above all, weakness in many of the region's currencies. This has meant that most central banks in the zone have intervened to moderate (or even reverse) currency losses. Even so, in the year as a whole, economic growth has been sound, at around 4.5%, nearly two points below the figure in 2010.

GDP growth in China has moderated following the efforts made to avoid overheating. Domestic demand and output remain strong and the pace of the slowdown has been in line with that of a soft landing. However, the problems caused by the external situation have increased and foreign demand is weaker. Inflation is moderating, although from a very high starting point. The above, combined with increasing downside risks, is impacting the implementation of a package of policies to support growth. In 2011 China's economic growth will be slightly above 9% (10.3% in 2010).

Finally, Turkey has been more exposed to periods of financial contagion from Europe, with a lower rate of capital inflows, falls in equity markets and a loss of value of the lira, forcing the Central Bank to intervene. Even so, the economy has grown strongly, around 8.5% in 2011, and inflation, although still high, has fallen to 6.5% (8.6% in 2010).

  • Trends in exchange rates

In the currency markets, the euro gained significantly against the dollar in the first half of the year due to the increasing spread between interest rates. This has been due to the different monetary policy approaches adopted by the ECB (preventive and focused on upward inflation risks) and the Federal Reserve (supporting recovery and focused on risks to growth). However, the deepening European debt crisis has weakened the euro’s position in the second half of the year. Nevertheless, as an annual average the dollar has lost 5.3% against the euro.

This combination of a strong euro and the relative strength of the emerging currencies against the dollar has resulted in a generally unfavorable performance of the currencies with the greatest weight in the BBVA Group's financial statements. As a result, the effect of exchange rates on a year-on-year comparison of the Group’s earnings is negative. In terms of final interest rates, the euro has practically not varied against the dollar. However, a more important loss of value in Latin American currencies with impact on the Group's balance sheet is in terms of annual averages. Its effect is also negative in on balance sheet items and volume of business. In 2012 the forecast is for appreciation of the dollar against the euro, while emerging currencies will have room for appreciation against the dollar.

Currency Average Exchange Rates Year-End Exchange Rates
2011 2010 2009 2011 2010 2009
Mexican peso 17.2906 16.7372 18.7988 18.0512 16.5475 18.9222
U.S.dollar 1.3916 1.3257 1.3948 1.2939 1.3362 1.4406
Argentine peso 5.7467 5.2686 5.2649 5.5679 5.4851 5.5571
Chilean peso 672.0430 675.68 777.60 674.76 625.39 730.46
Colombian peso 2,570.69 2,518.89 2,976.19 2,512.56 2,557.54 2,941.18
Peruvian new sol 3.8323 3.7448 4.1905 3.4890 3.7528 4.1626
Venezuelan bolivar 5.9765 5.6217 2.9950 5.5569 5.7385 3.0934
Turkish lira 2.3383 1.9965 2.1631 2.4432 2.0694 2.1547
Chinese Yuan 8.9932 8.9713 9.5277 8.1588 8.8220 9.8350