US Growth Looks Stable, Yet Still Some Uncontrolled Edges

The most transcendent economic and political facts of the beginning of 2015 are related to the stabilization of oil prices under $50, the strengthening of the US Dollar, the European Central Bank initiating the acquisition of European financial assets (including sovereign bonds) and the leftist government ascension into power in Greece.

In the middle of this scenario, the world’s leading business people meeting in Davos have expressed their pessimism in relation to the improvement of the world economy during the year 2015 in relation to the previous year. They consider that the vigor of the growth of the United States, on its own, will not be enough to push world development to desirable levels, even with the theoretical impulse that falling oil prices bestows to consumer countries.

Even if United States growth looks stable, there are yet some uncontrolled edges. The value of American corporate shares, which saw great increase in 2014, suffered a fall of 3% during January. This is due to investors forecasts that see the lowering of prevailing interests in the market have reduced the gains of American commercial banks, as well as the strengthening of the dollar having started to diminish exports (Microsoft, Caterpillar, Procter and Gamble, etc.) and the lowering of oil prices will diminish the yield of oil companies, the majority of which are American. In fact, the weight of this group of shares is what has determined the recent decrease in the American Stock Exchange.

In Europe, it is assumed that the European Central Bank's (ECB) decision of entering into a massive purchase of sovereign bonds and other financial assets (60 billion Euro per month) will at least have the effect of maintaining low interest rates and a depreciated Euro. They will have to increase prices and lower bond yields, maintain low interest rates and cost of money for businesses and consumers, therefore increasing production. This will help to increase inflation a bit closer to an annual 2%, which is procured in order to stave off deflation and improve exports competitiveness. But it doesn't seem certain that this will have the same effects produced by identical measures in the United States, Europe and Japan. As said by the President of the ECB, monetary policies can create the base for growth, but for growth to flourish you need investment, for investment, you need trust, and to produce trust structural reforms are needed. Ultimately, labor reforms, dosage of austerity measures, directing state investment to increase employment, exert adequate control over banks so that depositor confidence returns, all these as complex and varied as the European geography, are the reasons why there is skepticism in stockbroking, political and academic media as regards economic performance in the following months.

To this is added the rise into power of a challenging left government in Greece. The new government proposes a removal of the public debt and the creditors are averse to considering it. On the street, the bonds yield has increased 11% (which means prices have gone down), banks have lost more than 14 billion Euros in withdrawals and their shares have lost close to 20% of their value. The problem seems not an issue with the banks but rather lack of confidence in a new government, which lacks a plan. The road taken by the new government is to focus less on debt levels and more in obtaining space or fiscal liberality to restart the economy, this is, loosening the public spending controls required by the lenders. In the absence of an agreement with its creditors, the pending installments of the "rescue" loans that Greece receives will be suspended. The risk is that an impasse could occur leading Greece to default on its debt and into a new run on its banks, which could spread to Italy and Spain, which in turn would signify a fall in the prices of the bonds and shares in these countries, which would create a liability on the already slow growth of the European economy.

The negative effects of the fall in oil prices have deepened. Russia and Venezuela report them in the most visible way. In the last one, which depends almost exclusively on its oil revenue to subsist, the expectation that the crisis will lead to a total instability of its institutions and government grows. In Russia, these effects go beyond its vital importance for the fiscal coffers and its national economy. They drift toward geopolitics, because a way to force an increase in oil prices is to generate a world destabilization, which could be achieved by invading Ukraine or a Baltic country, challenging NATO into mobilization and generating winds of war.

Meanwhile, in January, prices of European shares reacted positively to the ECB's decision of beginning the purchase of European Bonds (with increases of 3% in average) and the yields of their bonds continue decreasing, which means investors maintain confidence in them, that is, in that its emitters will comply with their obligations.

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