Review of the World Scene
A review of the world scene on the month of December serves to envision all of 2014 and a glimpse the next year.
In December, the consequences of the lowering of oil prices were defined for the Russian economy, for the devaluation of its coin (the ruble), its corporate shares and the possible negative effects for other exporters of this product. The recuperation of the United States economy and the imminent raise of interest rates in that country were also confirmed, the risk of Europe’s low inflation, China’s economic growth, which will benefit from low oil process (stabilized between 7% and 8% for this and the next years) and the consequent reduction in volumes and prices of exports of raw materials to said country from some of the emerging economies, the Latin American ones among these.
The price of oil declined almost 50% since June 2014. It was a foreseeable effect, due to the increase of alternative production in the United States, which went from 5 million barrels per day in 2008 to 9 million in 2014 and created an excessive offer in the world market, the last failed effort to control said fall occurring in the end of the year OPEC meeting, when Saudi Arabia communicated they would not diminish their production. The effects in the Balance of Trade and the National Treasury of Russia, Iran and Venezuela will be severe: 60% of Russian exports are from energy products, 95% of Venezuelan exports are from oil, and Iran is having losses on the amount of a thousand million dollars monthly. This puts doubts in the capability of Venezuela to honor the service of its loans and sovereign bonds and it already affected the possibility of Russian banks and companies of refinancing their obligations since the ruble has catastrophically devalued, which diminished their quality as credit subjects in the international money market, to whom they must pay $30 billion dollars this month. These effects will extend to the field of geopolitics: Russia lacks funds to push its expansion policy towards Ukraine and maintain the annexation of Crimea; Iran loses its maneuvering capability to reach an agreement in regards to its nuclear program; Venezuela has difficulties to continue in its role as international benefactor (mainly with Cuba) and its government confronts a probable political crisis due to the impossibility of adequately funding its social projects and controlling a monstrous inflation. But where and how some lose, others win. China, who imports 60% of the crude oil it consumes, surpassed the United States in its position as the biggest importer in the world, will lower its production costs and internal consumption, which will favor its finished goods exports and the spending capacity of its inhabitants.
The economy of the United States concluded its recuperation process in 2014. The dollar has become entrenched. Since 2011, it has appreciated 20% in respect to the foreign exchange basket of the world’s principal currencies. With no more need of stimulus (eero rate interest and massive bond buying by the FED), the beginning of the increase in interest rates is expected for the first semester of 2015, a fact that has moved investors to begin the return of the capitals that migrated to the emergent economies during the Great Recession. In the political arena, where fierce ideological battles have become unbalances of the American economy, a sort of ominous calm is breathed, within which, even if in an unorthodox manner, the obstacle of the lack of legislative approval for the federal expenditure for $1.1 trillion dollars was overcome, and it remains to be seen how the relationship between President Obama with the new republican opposition majority who will control both chambers starting February 2015 will work. In any case, the growth of its economy for 2015 is estimated in 3.1%, which is very superior to the 1.3 estimated for Europe and 0.8 for Japan. At the end of the year, 70 months of increase of the North American shares are counted. In the year 2014, the Dow Jones index, S&P 500 and Nasdaq earned 7.52%, 11.39% and 13.4% respectively. Currently the P/E ratio of these shares is 16/1, which is considered equal to historic averages.
In Europe, the year 2014 closes and 2015 opens without clear perspectives. The way to obtain an adequate growth has not been found. The very low inflation is its visible impediment; it’s a virtual stagnation and it makes the economy meander very close to deflation. The application of measures to overcome this situation is stifled by the debate between the austerity propitiated by the rich northern countries and flexibility in regards to the ridged norms of controlled deficit petitioned by the countries with problems, amongst them Italy and France. These additionally propose that the recipe to be applied should be the same used with success by the FED, the Bank of England and the Bank of Japan in their respective countries, to wit: to influx money into the financial system through the massive buying of sovereign bonds and other financial products to the countries that need to sell them and from consumers to stimulate loans from banks to business and consumers and to provide the initial impulse to the new take of the economic process. But taking this measure is difficult in Europe because the European Central Bank, who would be the executive institution for this policy, is managed by a corpus whose members act in conformity to their constituents. The case is that Germany and other northern European Countries fear, that beyond initiating an accelerated inflationary process, that their inhabitants will have to pay for the cost of rescuing the European Central Bank in the case one or more of the issuing banks breach their obligations of serving the debts contracted through issuing their bonds. The risk of inaction, according to M. Draghi, President of the E.C.B. is to fall in a more pernicious situation than hyper-inflation, which is deflation, the situation in which the consumer waits for prices to fall and continue falling until he decides to buy, which brings about the fall of production and unemployment, which together are way more difficult to revert than any other economic phenomenon. A proposal that seems tending towards the intervention of the Central European Bank in the massive bond purchasing is the Juncker [President of the European Commission) plan, which would consist in a coordinated system of public and private investment for 315.000 million euros, that would create 1.3 million jobs in the next 3 years.
Essentially, these times of moderate expectations. Attention must be given to the variations, which possibly will appear from the beginning of the new year.← Back to News Releases