In the fourth quarter of 2011, the global economy once more combined fairly solid growth at a global level, particularly with the boost from emerging economies (though with signs of a slowdown), with a high level of tension on the financial markets as a result of the lack of resolution to the public debt crisis in Europe.
By regions, financial tension increased in Europe and has even extended to core countries. The response to this new wave of tension has been only partly effective. The ECB has reversed the interest-rate rises begun at the start of 2011, and at the same time implemented new measures to support long-term liquidity in the financial system. However, it has not shown greater commitment to direct intervention in the sovereign bond markets, beyond the current program, which was particularly active over the quarter for Spanish and Italian debt. On the question of governance, the agreements reached at the European summit on December 8 and 9 have been a step in the right direction, in particular with respect to greater vigilance of private and public imbalances in the euro zone. Nevertheless, there has still not been any substantial progress towards fiscal union or on the question of Eurobonds. Against this background, the European economy contracted slightly in the fourth quarter as a result of declining domestic demand due to uncertainty and a weaker foreign sector. Growth in the Spanish economy was weak and the process of fiscal consolidation and a fragile labor market have not been offset by a very dynamic foreign sector.
The outlook worsened in the United States over the year, although the likelihood of renewed recession, which appeared strong in the summer, has partially cleared. Published figures give a somewhat more positive note, with growth gathering pace slightly, though it has still not reached a sufficiently solid level. Concerns also remain about the state of the public finances and the necessary process of fiscal consolidation, which is still awaiting the outcome of negotiations in Congress for the details to be worked out.
Despite the slowdown in advanced economies, emerging economies continue with a good pattern of growth towards more sustainable but robust levels, in particular supported by the strength of domestic demand. In Mexico the economy is still growing solidly, despite some slowdown towards the end of 2011. Inflation is within the comfort zone. There are also clear signs of strength in South America, although the global slowdown has led to a slight moderation in growth. Economic activity in China also moved towards a soft landing in the fourth quarter. Domestic demand remains relatively robust, but the reduced dynamism at a global level has had some negative impact on the country’s exports. As a result of the measures adopted to prevent the economy from overheating, inflation is moderating and closed the year at around the government target. This has led to a pause in the cycle of interest-rate rises and the first signs of a more accommodative monetary policy. Finally, Turkey has been more exposed to phases 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. Economic activity felt the impact towards the end of 2011, but it is still fairly buoyant.
With respect to exchange rates, there was general appreciation over the quarter on the final rates of currencies with the biggest influence on the Group’s financial statements. In terms of average exchange rates, the Mexican, Chilean and Colombian pesos depreciated slightly. In year-on-year terms, the final rate of the Mexican peso depreciated, as to a lesser extent did the Chilean and Argentinean pesos. In contrast, there was a year-on-year appreciation in the dollar fixing rate (though a depreciation in average rates), as there was with the rest of the key Latin American currencies. To sum up, the impact over the quarter of currencies is positive on both the balance sheet and on business and earnings. In contrast, the effect is negative in the year-on-year comparison.