European Economy Evolves Better Than Previously Calculated

The news that the European economy has been evolving, in reality, better than previously calculated has generated optimism. This, due to the surprising recent German expansion numbers, at a rate of 0.7% in the last quarter, boosted by the increase of domestic demand. Even if European expansion (annualized 1.4%) has been behind the United States’ (annualized 2.6%, which is low for American standards), this data allows us to think that the recuperation is definitely taking strength. The Eurozone is worth almost 17% of the world’s economy, and until now, it was failing in its attempts of coming out of the 2008 crisis.

Among the reasons for this optimism the strengthening of the American coin and the Euro’s weakness are included, since this strengthens European exports. Also the European Central Bank’s program (which will begin in March 2015) of intervening in financial markets to acquire 60 billion Euros of debt monthly, including government bonds, which is expected to restore credit and encourage investors, and the impact of the fall in oil prices, the value of which has fallen mainly into the hands of consumers, has stimulated spending in many other areas. For this reason, European indicators show corporate shares values increasing perceptibly this month in Madrid, Milan and London, 6% and 8%, and bond yields continue to fall, which means that prices, due to more demand, are increasing. This situation is very different from that of a year ago, a time in which countries like Spain and Italy had desisted of selling bonds due to the high investment rate required by investors.

After many ultimatums, by month’s closing the Europeans were able to overcome (or postpone) the eventual calamity that Greece’s default and exit from the Euro system would have been. It was agreed to give a four month extension to the rescue program (which has kept Greece floating for more than five years) and allow the money flux given to them by its creditors (the other 18 Eurozone countries) to continue, in exchange for certain changes: control of Tax evasion, improvement in sales tax collection and modifications in the rules that regulate competiveness. The advantage is that this extension entails the possibility of negotiating a solution that goes in the line of stimulating its economy and reduces the unnecessary suffering to its population due to the application of the already hated “austerity.” There are still political issues to be solved in order to perfect this agreement. But, ultimately, if the agreement is to be viable long term, on the one hand the terms and conditions of the loans given to Greece must be loosened, with more space for repayment and some easing in the requirements of obtaining surplus in its annual budgets, and on the other hand, its government must make efforts to comply on what it has offered its creditors.

In the United States, the steady pace of economic recovery and growth are only perturbed by political confrontations. There has been many occasions in which one or more government institutions (and even the whole of it) have been at the border of suspending payments of salaries, public works contracts and public debt due dates. On this occasion as well, almost on the edge of the cliff, a few hours before funds were exhausted, the legislators reached a transitory agreement that avoided the closing of the Department of Homeland Security. The problem consisted in that the Republican-dominated congress was trying to exchange the approval of these regular expenditures with certain amendments, which would block the regularization of a few million immigrants approved by the White House. It seems that what opened the way for the transitory agreement was the certainty that the population would punish the Republicans for trying to impose their criteria in this migratory topic by prejudicing the normal performance of Government functions, instead of separately promoting a bill for regulating migratory measures. Even within this expectant political situation, markets continue acting bullish: the Dow Jones ends the month with more than 4% growth, as well as the S&P 500, and Nasdaq100 with a 6% growth.

In Latin America, the situation created by the deceleration of China’s growth does not seem catastrophic, maybe with the exception of Venezuela, whose absolute dependence on oil prices can deliver it into a dramatic outcome. The confidence crisis caused by the revealed acts of corruption could transform into true political schism in Mexico and Argentina. In Brazil, even with the Petrobras scandal, the backlash does not alter the growing Stock Exchange indicators, higher than 8% this month.

During the rest of the quarter the reaches or consequences of the political crisis in Ukraine could be defined, which until now has only influenced importantly the value of the ruble and the Russian commercial balance, payments and national treasury.

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